Tess Holdings Co.,Ltd.'s (TSE:5074) Shares Leap 26% Yet They're Still Not Telling The Full Story

Despite an already strong run, Tess Holdings Co.,Ltd. (TSE:5074) shares have been powering on, with a gain of 26% in the last thirty days. While recent buyers may be laughing, long-term holders might not be as pleased since the recent gain only brings the stock back to where it started a year ago.

Although its price has surged higher, it's still not a stretch to say that Tess HoldingsLtd's price-to-sales (or "P/S") ratio of 0.8x right now seems quite "middle-of-the-road" compared to the Construction industry in Japan, where the median P/S ratio is around 0.5x. 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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Check out our latest analysis for Tess HoldingsLtd

What Does Tess HoldingsLtd's P/S Mean For Shareholders?

With revenue growth that's inferior to most other companies of late, Tess HoldingsLtd has been relatively sluggish. One possibility is that the P/S ratio is moderate because investors think this lacklustre revenue performance will turn around. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

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

How Is Tess HoldingsLtd's Revenue Growth Trending?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Tess HoldingsLtd's to be considered reasonable.

Taking a look back first, we see that the company managed to grow revenues by a handy 4.1% last year. Ultimately though, it couldn't turn around the poor performance of the prior period, with revenue shrinking 1.8% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Shifting to the future, estimates from the three analysts covering the company suggest revenue should grow by 20% each year over the next three years. With the industry only predicted to deliver 2.7% each year, the company is positioned for a stronger revenue result.

With this in consideration, we find it intriguing that Tess HoldingsLtd's P/S is closely matching its industry peers. It may be that most investors aren't convinced the company can achieve future growth expectations.

The Key Takeaway

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

We've established that Tess HoldingsLtd currently trades on a lower than expected P/S since its forecasted revenue growth is higher than the wider industry. There could be some risks that the market is pricing in, which is preventing the P/S ratio from matching the positive outlook. At least the risk of a price drop looks to be subdued, but investors seem to think future revenue could see some volatility.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Tess HoldingsLtd (1 can't be ignored!) that you need to be mindful of.

If you're unsure about the strength of Tess HoldingsLtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.