IMAGE MAGIC Inc. (TSE:7793) Soars 32% But It's A Story Of Risk Vs Reward

IMAGE MAGIC Inc. (TSE:7793) shareholders would be excited to see that the share price has had a great month, posting a 32% gain and recovering from prior weakness. While recent buyers may be laughing, long-term holders might not be as pleased since the recent gain only brings the stock back to where it started a year ago.

Even after such a large jump in price, it's still not a stretch to say that IMAGE MAGIC's price-to-sales (or "P/S") ratio of 0.4x right now seems quite "middle-of-the-road" compared to the Commercial Services industry in Japan, where the median P/S ratio is around 0.6x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

View our latest analysis for IMAGE MAGIC

How Has IMAGE MAGIC Performed Recently?

IMAGE MAGIC 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.

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

Is There Some Revenue Growth Forecasted For IMAGE MAGIC?

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

Retrospectively, the last year delivered an exceptional 23% gain to the company's top line. The strong recent performance means it was also able to grow revenue by 42% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Comparing that to the industry, which is only predicted to deliver 4.3% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised revenue results.

In light of this, it's curious that IMAGE MAGIC'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 IMAGE MAGIC's P/S?

IMAGE MAGIC's stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

To our surprise, IMAGE MAGIC 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. There could be some unobserved threats to revenue preventing the P/S ratio from matching this positive performance. At least the risk of a price drop looks to be subdued if recent medium-term revenue trends continue, but investors seem to think future revenue could see some volatility.

Plus, you should also learn about this 1 warning sign we've spotted with IMAGE MAGIC.

If these risks are making you reconsider your opinion on IMAGE MAGIC, 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.