What Marumae Co., Ltd.'s (TSE:6264) 25% Share Price Gain Is Not Telling You

Marumae Co., Ltd. (TSE:6264) shareholders have had their patience rewarded with a 25% share price jump in the last month. Looking further back, the 18% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

After such a large jump in price, given around half the companies in Japan's Machinery industry have price-to-sales ratios (or "P/S") below 0.7x, you may consider Marumae as a stock to avoid entirely with its 2.7x 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 so lofty.

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Check out our latest analysis for Marumae

How Marumae Has Been Performing

Recent times have been quite advantageous for Marumae as its revenue has been rising very briskly. It seems that many are expecting the strong revenue performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

Is There Enough Revenue Growth Forecasted For Marumae?

The only time you'd be truly comfortable seeing a P/S as steep as Marumae's is when the company's growth is on track to outshine the industry decidedly.

Retrospectively, the last year delivered an exceptional 80% gain to the company's top line. The latest three year period has also seen a 10% overall rise in revenue, aided extensively by its short-term performance. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

It's interesting to note that the rest of the industry is similarly expected to grow by 4.4% over the next year, which is fairly even with the company's recent medium-term annualised growth rates.

With this information, we find it interesting that Marumae is trading at a high P/S compared to the industry. It seems most investors are ignoring the fairly average recent growth rates and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as a continuation of recent revenue trends would weigh down the share price eventually.

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

The strong share price surge has lead to Marumae's P/S soaring as well. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our look into Marumae has shown that it currently trades on a higher than expected P/S since its recent three-year growth is only in line with the wider industry forecast. Right now we are uncomfortable with the high P/S as this revenue performance isn't likely to support such positive sentiment for long. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.

Don't forget that there may be other risks. For instance, we've identified 4 warning signs for Marumae (2 can't be ignored) you should be aware of.

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.