G-Factory Co.,Ltd. (TSE:3474) Soars 42% But It's A Story Of Risk Vs Reward

G-Factory Co.,Ltd. (TSE:3474) shares have continued their recent momentum with a 42% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 64%.

Although its price has surged higher, there still wouldn't be many who think G-FactoryLtd's price-to-sales (or "P/S") ratio of 0.8x is worth a mention when the median P/S in Japan's Professional Services industry is similar at about 1.1x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

See our latest analysis for G-FactoryLtd

What Does G-FactoryLtd's Recent Performance Look Like?

G-FactoryLtd has been doing a good job lately as it's been growing revenue at a solid pace. One possibility is that the P/S is moderate because investors think this respectable revenue growth might not be enough to outperform the broader industry in the near future. If that doesn't eventuate, then existing shareholders probably aren't too pessimistic about the future direction of the share price.

Although there are no analyst estimates available for G-FactoryLtd, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is G-FactoryLtd's Revenue Growth Trending?

G-FactoryLtd'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.

Taking a look back first, we see that the company grew revenue by an impressive 17% last year. Pleasingly, revenue has also lifted 54% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Comparing that recent medium-term revenue trajectory with the industry's one-year growth forecast of 5.3% shows it's noticeably more attractive.

In light of this, it's curious that G-FactoryLtd's P/S sits in line with the majority of other companies. It may be that most investors are not convinced the company can maintain its recent growth rates.

What We Can Learn From G-FactoryLtd's P/S?

G-FactoryLtd appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

To our surprise, G-FactoryLtd revealed its three-year revenue trends aren't contributing to its P/S as much as we would have predicted, given they look better than current industry expectations. It'd be fair to assume that potential risks the company faces could be the contributing factor to the lower than expected P/S. While recent revenue trends over the past medium-term suggest that the risk of a price decline is low, investors appear to see the likelihood of revenue fluctuations in the future.

You should always think about risks. Case in point, we've spotted 2 warning signs for G-FactoryLtd you should be aware of, and 1 of them is a bit unpleasant.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com