Toyo Engineering Corporation's (TSE:6330) 29% Price Boost Is Out Of Tune With Revenues

Toyo Engineering Corporation (TSE:6330) shares have continued their recent momentum with a 29% gain in the last month alone. This latest share price bounce rounds out a remarkable 323% gain over the last twelve months.

Although its price has surged higher, there still wouldn't be many who think Toyo Engineering's price-to-sales (or "P/S") ratio of 0.7x is worth a mention when the median P/S in Japan's Construction industry is similar at about 0.6x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

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See our latest analysis for Toyo Engineering

How Has Toyo Engineering Performed Recently?

Toyo Engineering could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. It might be that many expect the dour revenue performance to strengthen positively, which has kept the P/S from falling. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Toyo Engineering.

How Is Toyo Engineering's Revenue Growth Trending?

Toyo Engineering's P/S ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the industry.

Retrospectively, the last year delivered a frustrating 5.8% decrease to the company's top line. This has soured the latest three-year period, which nevertheless managed to deliver a decent 24% overall rise in revenue. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been mostly respectable for the company.

Turning to the outlook, the next year should bring diminished returns, with revenue decreasing 15% as estimated by the dual analysts watching the company. With the industry predicted to deliver 3.4% growth, that's a disappointing outcome.

With this in consideration, we think it doesn't make sense that Toyo Engineering's P/S is closely matching its industry peers. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock right now. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the negative growth outlook.

The Key Takeaway

Its shares have lifted substantially and now Toyo Engineering's P/S is back within range of the industry median. 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.

It appears that Toyo Engineering currently trades on a higher than expected P/S for a company whose revenues are forecast to decline. With this in mind, we don't feel the current P/S is justified as declining revenues are unlikely to support a more positive sentiment for long. If the declining revenues were to materialize in the form of a declining share price, shareholders will be feeling the pinch.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Toyo Engineering you should know about.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.