Tongtai Machine & Tool Co., Ltd.'s (TWSE:4526) Shares Bounce 26% But Its Business Still Trails The Industry

Despite an already strong run, Tongtai Machine & Tool Co., Ltd. (TWSE:4526) shares have been powering on, with a gain of 26% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 35% in the last year.

In spite of the firm bounce in price, Tongtai Machine & Tool's price-to-sales (or "P/S") ratio of 0.8x might still make it look like a buy right now compared to the Machinery industry in Taiwan, where around half of the companies have P/S ratios above 1.9x and even P/S above 4x are quite common. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Tongtai Machine & Tool

What Does Tongtai Machine & Tool's P/S Mean For Shareholders?

For example, consider that Tongtai Machine & Tool's financial performance has been poor lately as its revenue has been in decline. Perhaps the market believes the recent revenue performance isn't good enough to keep up the industry, causing the P/S ratio to suffer. Those who are bullish on Tongtai Machine & Tool will be hoping that this isn't the case so that they can pick up the stock at a lower valuation.

Although there are no analyst estimates available for Tongtai Machine & Tool, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Is There Any Revenue Growth Forecasted For Tongtai Machine & Tool?

The only time you'd be truly comfortable seeing a P/S as low as Tongtai Machine & Tool's is when the company's growth is on track to lag the industry.

Retrospectively, the last year delivered a frustrating 7.8% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 2.0% in aggregate. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Comparing that to the industry, which is predicted to deliver 14% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this in mind, we understand why Tongtai Machine & Tool's P/S is lower than most of its industry peers. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. Even just maintaining these prices could be difficult to achieve as recent revenue trends are already weighing down the shares.

The Key Takeaway

The latest share price surge wasn't enough to lift Tongtai Machine & Tool's P/S close to the industry median. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Tongtai Machine & Tool confirms that the company's shrinking revenue over the past medium-term is a key factor in its low price-to-sales ratio, given the industry is projected to grow. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. If recent medium-term revenue trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

There are also other vital risk factors to consider and we've discovered 5 warning signs for Tongtai Machine & Tool (2 are concerning!) that you should be aware of before investing here.

If these risks are making you reconsider your opinion on Tongtai Machine & Tool, explore our interactive list of high quality stocks to get an idea of what else is out there.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.