Some Confidence Is Lacking In Coplus Inc.'s (TWSE:2254) P/S

Simply Wall St · 10/15 07:40

Coplus Inc.'s (TWSE:2254) price-to-sales (or "P/S") ratio of 8.3x may look like a poor investment opportunity when you consider close to half the companies in the Auto Components industry in Taiwan have P/S ratios below 1.8x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Coplus

ps-multiple-vs-industry
TWSE:2254 Price to Sales Ratio vs Industry October 15th 2024

How Has Coplus Performed Recently?

Revenue has risen firmly for Coplus recently, which is pleasing to see. One possibility is that the P/S ratio is high because investors think this respectable revenue growth will be enough to outperform the broader industry in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Coplus will help you shine a light on its historical performance.

How Is Coplus' Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as steep as Coplus' is when the company's growth is on track to outshine the industry decidedly.

Retrospectively, the last year delivered an exceptional 20% gain to the company's top line. Still, revenue has fallen 30% in total from three years ago, which is quite disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenues over that time.

Comparing that to the industry, which is predicted to deliver 6.8% 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 find it worrying that Coplus' P/S exceeds that of its industry peers. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

What We Can Learn From Coplus' P/S?

Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

We've established that Coplus currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

There are also other vital risk factors to consider and we've discovered 3 warning signs for Coplus (2 make us uncomfortable!) that you should be aware of before investing here.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).