What Japan Power Fastening Co.,Ltd.'s (TSE:5950) 27% Share Price Gain Is Not Telling You

Despite an already strong run, Japan Power Fastening Co.,Ltd. (TSE:5950) shares have been powering on, with a gain of 27% in the last thirty days. The last month tops off a massive increase of 122% in the last year.

Even after such a large jump in price, there still wouldn't be many who think Japan Power FasteningLtd's price-to-sales (or "P/S") ratio of 0.8x is worth a mention when the median P/S in Japan's Machinery industry is similar at about 0.7x. 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.

See our latest analysis for Japan Power FasteningLtd

What Does Japan Power FasteningLtd's P/S Mean For Shareholders?

As an illustration, revenue has deteriorated at Japan Power FasteningLtd over the last year, which is not ideal at all. It might be that many expect the company to put the disappointing revenue performance behind them over the coming period, which has kept the P/S from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Japan Power FasteningLtd's earnings, revenue and cash flow.

What Are Revenue Growth Metrics Telling Us About The P/S?

Japan Power FasteningLtd'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 6.1% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 3.2% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 5.6% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this information, we find it concerning that Japan Power FasteningLtd is trading at a fairly similar P/S compared to the industry. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh on the share price eventually.

The Bottom Line On Japan Power FasteningLtd's P/S

Japan Power FasteningLtd 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.

The fact that Japan Power FasteningLtd currently trades at a P/S on par with the rest of the industry is surprising to us since its recent revenues have been in decline over the medium-term, all while the industry is set to grow. Even though it matches the industry, we're uncomfortable with the current P/S ratio, as this dismal revenue performance is unlikely to support a more positive sentiment for long. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Japan Power FasteningLtd (1 is potentially serious!) that you need to be mindful of.

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).

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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.