Improved Revenues Required Before Advanex Inc. (TSE:5998) Stock's 28% Jump Looks Justified

Advanex Inc. (TSE:5998) shares have continued their recent momentum with a 28% gain in the last month alone. The annual gain comes to 132% following the latest surge, making investors sit up and take notice.

Even after such a large jump in price, considering around half the companies operating in Japan's Machinery industry have price-to-sales ratios (or "P/S") above 0.8x, you may still consider Advanex as an solid investment opportunity with its 0.3x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

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Check out our latest analysis for Advanex

What Does Advanex's Recent Performance Look Like?

Recent times have been advantageous for Advanex as its revenues have been rising faster than most other companies. One possibility is that the P/S ratio is low because investors think this strong revenue performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Advanex.

How Is Advanex's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as low as Advanex's is when the company's growth is on track to lag the industry.

If we review the last year of revenue growth, the company posted a worthy increase of 7.0%. This was backed up an excellent period prior to see revenue up by 31% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 2.1% during the coming year according to the only analyst following the company. Meanwhile, the rest of the industry is forecast to expand by 4.5%, which is noticeably more attractive.

With this information, we can see why Advanex is trading at a P/S lower than the industry. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

What We Can Learn From Advanex's P/S?

Despite Advanex's share price climbing recently, its P/S still lags most other companies. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Advanex maintains its low P/S on the weakness of its forecast growth being lower than the wider industry, as expected. Shareholders' pessimism on the revenue prospects for the company seems to be the main contributor to the depressed P/S. The company will need a change of fortune to justify the P/S rising higher in the future.

It is also worth noting that we have found 3 warning signs for Advanex (2 make us uncomfortable!) that you need to take into consideration.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.