What Chiyoda Corporation's (TSE:6366) 48% Share Price Gain Is Not Telling You

Chiyoda Corporation (TSE:6366) shareholders have had their patience rewarded with a 48% share price jump in the last month. The last 30 days bring the annual gain to a very sharp 77%.

Although its price has surged higher, there still wouldn't be many who think Chiyoda's price-to-sales (or "P/S") ratio of 0.4x is worth a mention when the median P/S in Japan's Construction industry is similar at about 0.6x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

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View our latest analysis for Chiyoda

How Chiyoda Has Been Performing

Chiyoda could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. One possibility is that the P/S ratio is moderate because investors think this poor revenue performance will turn around. If not, then existing shareholders may be a little nervous about the viability of the share price.

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

Is There Some Revenue Growth Forecasted For Chiyoda?

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

Retrospectively, the last year delivered a frustrating 12% decrease to the company's top line. Regardless, revenue has managed to lift by a handy 19% in aggregate from three years ago, thanks to the earlier period of growth. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of revenue growth.

Turning to the outlook, the next three years should bring diminished returns, with revenue decreasing 5.2% per annum as estimated by the four analysts watching the company. Meanwhile, the broader industry is forecast to expand by 2.3% each year, which paints a poor picture.

In light of this, it's somewhat alarming that Chiyoda's P/S sits in line with the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as these declining revenues are likely to weigh on the share price eventually.

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

Its shares have lifted substantially and now Chiyoda's P/S is back within range of the industry median. 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.

Our check of Chiyoda's analyst forecasts revealed that its outlook for shrinking revenue isn't bringing down its P/S as much as we would have predicted. When we see a gloomy outlook like this, our immediate thoughts are that the share price is at risk of declining, negatively impacting P/S. If the declining revenues were to materialize in the form of a declining share price, shareholders will be feeling the pinch.

You should always think about risks. Case in point, we've spotted 2 warning signs for Chiyoda you should be aware of, and 1 of them can't be ignored.

If these risks are making you reconsider your opinion on Chiyoda, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.