Investors Still Waiting For A Pull Back In Souken Ace Co., Ltd. (TSE:1757)

When close to half the companies in the Consumer Durables industry in Japan have price-to-sales ratios (or "P/S") below 0.4x, you may consider Souken Ace Co., Ltd. (TSE:1757) as a stock to avoid entirely with its 3.6x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Souken Ace

What Does Souken Ace's P/S Mean For Shareholders?

As an illustration, revenue has deteriorated at Souken Ace over the last year, which is not ideal at all. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.

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

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

The only time you'd be truly comfortable seeing a P/S as steep as Souken Ace's is when the company's growth is on track to outshine the industry decidedly.

Retrospectively, the last year delivered a frustrating 54% decrease to the company's top line. Still, the latest three year period has seen an excellent 48% overall rise in revenue, in spite of its unsatisfying short-term performance. Accordingly, while they would have preferred to keep the run going, shareholders would definitely welcome the medium-term rates of revenue growth.

Weighing the recent medium-term upward revenue trajectory against the broader industry's one-year forecast for contraction of 0.07% shows it's a great look while it lasts.

With this in mind, it's clear to us why Souken Ace's P/S exceeds that of its industry peers. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the industry. Nonetheless, with most other businesses facing an uphill battle, staying on its current revenue path is no certainty.

The Bottom Line On Souken Ace's P/S

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.

We see that Souken Ace justifiably maintains its high P/S on the merits of its recentthree-year revenue growth beating forecasts amidst struggling industry. Right now shareholders are comfortable with the P/S as they are quite confident revenues aren't under threat. However, it'd be fair to raise concerns over whether this level of revenue performance will continue given the harsh conditions facing the industry. If things remain consistent though, shareholders shouldn't expect any major share price shocks in the near term.

Plus, you should also learn about these 4 warning signs we've spotted with Souken Ace (including 1 which makes us a bit uncomfortable).

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.