Some Confidence Is Lacking In Aqualine Ltd. (TSE:6173) As Shares Slide 32%

The Aqualine Ltd. (TSE:6173) share price has fared very poorly over the last month, falling by a substantial 32%. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 41% share price drop.

In spite of the heavy fall in price, you could still be forgiven for feeling indifferent about Aqualine's P/S ratio of 0.2x, since the median price-to-sales (or "P/S") ratio for the Commercial Services industry in Japan is also close to 0.6x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

View our latest analysis for Aqualine

What Does Aqualine's Recent Performance Look Like?

Revenue has risen at a steady rate over the last year for Aqualine, which is generally not a bad outcome. Perhaps the expectation moving forward is that the revenue growth will track in line with the wider industry for the near term, which has kept the P/S subdued. If not, then at least existing shareholders probably aren't too pessimistic about the future direction of the share price.

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

How Is Aqualine's Revenue Growth Trending?

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

If we review the last year of revenue growth, the company posted a worthy increase of 5.7%. Still, lamentably revenue has fallen 20% in aggregate from three years ago, which is disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

In contrast to the company, the rest of the industry is expected to grow by 4.2% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this information, we find it concerning that Aqualine 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.

The Bottom Line On Aqualine's P/S

With its share price dropping off a cliff, the P/S for Aqualine looks to be in line with the rest of the Commercial Services industry. 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.

We find it unexpected that Aqualine trades at a P/S ratio that is comparable to the rest of the industry, despite experiencing declining revenues during the medium-term, while the industry as a whole is expected to grow. Even though it matches the industry, we're uncomfortable with the current P/S ratio, as this dismal revenue performance is unlikely to support a more positive sentiment for long. 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 5 warning signs for Aqualine (of which 3 are potentially serious!) you should know about.

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.

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