TWOSTONE&Sons Inc.'s (TSE:7352) 42% Cheaper Price Remains In Tune With Revenues

To the annoyance of some shareholders, TWOSTONE&Sons Inc. (TSE:7352) shares are down a considerable 42% in the last month, which continues a horrid run for the company. Longer-term shareholders will rue the drop in the share price, since it's now virtually flat for the year after a promising few quarters.

Although its price has dipped substantially, given close to half the companies operating in Japan's Professional Services industry have price-to-sales ratios (or "P/S") below 1x, you may still consider TWOSTONE&Sons as a stock to potentially avoid with its 2.5x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

View our latest analysis for TWOSTONE&Sons

What Does TWOSTONE&Sons' P/S Mean For Shareholders?

With revenue growth that's superior to most other companies of late, TWOSTONE&Sons has been doing relatively well. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. If not, then existing shareholders might 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 TWOSTONE&Sons.

What Are Revenue Growth Metrics Telling Us About The High P/S?

There's an inherent assumption that a company should outperform the industry for P/S ratios like TWOSTONE&Sons' to be considered reasonable.

Taking a look back first, we see that the company grew revenue by an impressive 41% last year. The latest three year period has also seen an excellent 204% overall rise in revenue, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing revenue over that time.

Looking ahead now, revenue is anticipated to climb by 25% per annum during the coming three years according to the only analyst following the company. That's shaping up to be materially higher than the 7.2% per annum growth forecast for the broader industry.

With this in mind, it's not hard to understand why TWOSTONE&Sons' P/S is high relative to its industry peers. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

Despite the recent share price weakness, TWOSTONE&Sons' P/S remains higher than most other companies in the industry. 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.

Our look into TWOSTONE&Sons shows that its P/S ratio remains high on the merit of its strong future revenues. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

It is also worth noting that we have found 4 warning signs for TWOSTONE&Sons (1 makes us a bit uncomfortable!) that you need to take into consideration.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.

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