Why Investors Shouldn't Be Surprised By Motorcar Parts of America, Inc.'s (NASDAQ:MPAA) Low P/S

You may think that with a price-to-sales (or "P/S") ratio of 0.1x Motorcar Parts of America, Inc. (NASDAQ:MPAA) is a stock worth checking out, seeing as almost half of all the Auto Components companies in the United States have P/S ratios greater than 0.8x and even P/S higher than 3x aren't out of the ordinary. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

See our latest analysis for Motorcar Parts of America

What Does Motorcar Parts of America's Recent Performance Look Like?

Motorcar Parts of America certainly has been doing a good job lately as it's been growing revenue more than most other companies. It might be that many expect the strong revenue performance to degrade substantially, which has repressed the share price, and thus the P/S ratio. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Keen to find out how analysts think Motorcar Parts of America's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Motorcar Parts of America's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as low as Motorcar Parts of America's is when the company's growth is on track to lag the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 11% last year. The latest three year period has also seen an excellent 38% overall rise in revenue, aided somewhat by its short-term performance. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Turning to the outlook, the next year should generate growth of 4.7% as estimated by the only analyst watching the company. With the industry predicted to deliver 7.7% growth, the company is positioned for a weaker revenue result.

With this in consideration, its clear as to why Motorcar Parts of America's P/S is falling short industry peers. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Key Takeaway

It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Motorcar Parts of America maintains its low P/S on the weakness of its forecast growth being lower than the wider industry, as expected. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

You always need to take note of risks, for example - Motorcar Parts of America has 1 warning sign we think you should be aware of.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.