What Japan Power Fastening Co.,Ltd.'s (TSE:5950) 34% 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 34% in the last thirty days. The last month tops off a massive increase of 219% in the last year.

In spite of the firm bounce in price, it's still not a stretch to say that Japan Power FasteningLtd's price-to-sales (or "P/S") ratio of 1.1x right now seems quite "middle-of-the-road" compared to the Machinery industry in Japan, where the median P/S ratio is around 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?

For example, consider that Japan Power FasteningLtd's financial performance has been poor lately as its revenue has been in decline. 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 you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

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

Do Revenue Forecasts Match The P/S Ratio?

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

Retrospectively, the last year delivered a frustrating 3.9% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 4.5% in aggregate. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 5.0% shows it's an unpleasant look.

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.

What We Can Learn From 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. When we see revenue heading backwards in the context of growing industry forecasts, it'd make sense to expect a possible share price decline on the horizon, sending the moderate P/S lower. If recent medium-term revenue trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

And what about other risks? Every company has them, and we've spotted 4 warning signs for Japan Power FasteningLtd (of which 2 are a bit unpleasant!) you should know about.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.