Daiho Corporation's (TSE:1822) Share Price Could Signal Some Risk

With a median price-to-sales (or "P/S") ratio of close to 0.4x in the Construction industry in Japan, you could be forgiven for feeling indifferent about Daiho Corporation's (TSE:1822) P/S ratio of 0.3x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

View our latest analysis for Daiho

What Does Daiho's P/S Mean For Shareholders?

Daiho could be doing better as it's been growing revenue less than most other companies lately. It might be that many expect the uninspiring revenue performance to strengthen positively, which has kept the P/S ratio from falling. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

How Is Daiho's Revenue Growth Trending?

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

Retrospectively, the last year delivered a decent 4.6% gain to the company's revenues. Although, the latest three year period in total hasn't been as good as it didn't manage to provide any growth at all. So it appears to us that the company has had a mixed result in terms of growing revenue over that time.

Shifting to the future, estimates from the one analyst covering the company suggest revenue growth is heading into negative territory, declining 0.3% each year over the next three years. With the industry predicted to deliver 3.2% growth per year, that's a disappointing outcome.

In light of this, it's somewhat alarming that Daiho's P/S sits in line with the majority of other companies. 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 Final Word

Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

While Daiho's P/S isn't anything out of the ordinary for companies in the industry, we didn't expect it given forecasts of revenue decline. When we see a gloomy outlook like this, our immediate thoughts are that the share price is at risk of declining, negatively impacting P/S. If the poor revenue outlook tells us one thing, it's that these current price levels could be unsustainable.

You always need to take note of risks, for example - Daiho has 1 warning sign we think 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.

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