Revenues Not Telling The Story For EXEDY Corporation (TSE:7278) After Shares Rise 29%

EXEDY Corporation (TSE:7278) shareholders have had their patience rewarded with a 29% share price jump in the last month. Looking back a bit further, it's encouraging to see the stock is up 59% in the last year.

In spite of the firm bounce in price, you could still be forgiven for feeling indifferent about EXEDY's P/S ratio of 0.6x, since the median price-to-sales (or "P/S") ratio for the Auto Components industry in Japan is also close to 0.3x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

See our latest analysis for EXEDY

How EXEDY Has Been Performing

EXEDY's revenue growth of late has been pretty similar to most other companies. It seems that many are expecting the mediocre revenue performance to persist, which has held the P/S ratio back. If you like the company, you'd be hoping this can at least be maintained so that you could pick up some stock while it's not quite in favour.

Want the full picture on analyst estimates for the company? Then our free report on EXEDY will help you uncover what's on the horizon.

Is There Some Revenue Growth Forecasted For EXEDY?

In order to justify its P/S ratio, EXEDY would need to produce growth that's similar to the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 5.4% last year. The solid recent performance means it was also able to grow revenue by 23% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

Shifting to the future, estimates from the dual analysts covering the company suggest revenue growth is heading into negative territory, declining 0.5% over the next year. Meanwhile, the broader industry is forecast to expand by 2.6%, which paints a poor picture.

With this information, we find it concerning that EXEDY is trading at a fairly similar P/S compared to the industry. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as these declining revenues are likely to weigh on the share price eventually.

The Bottom Line On EXEDY's P/S

EXEDY appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry 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.

It appears that EXEDY 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 we consider the revenue outlook, the P/S seems to indicate that potential investors may be paying a premium for the stock.

Before you settle on your opinion, we've discovered 1 warning sign for EXEDY that you should be aware of.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.