Revenues Tell The Story For Souken Ace Co., Ltd. (TSE:1757) As Its Stock Soars 32%

Souken Ace Co., Ltd. (TSE:1757) shareholders would be excited to see that the share price has had a great month, posting a 32% gain and recovering from prior weakness. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 17% in the last twelve months.

Following the firm bounce in price, when almost half of the companies in Japan's Consumer Durables industry have price-to-sales ratios (or "P/S") below 0.5x, you may consider Souken Ace as a stock not worth researching with its 3.9x 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.

Check out our latest analysis for Souken Ace

How Souken Ace Has Been Performing

As an illustration, revenue has deteriorated at Souken Ace over the last year, which is not ideal at all. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. 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.

Do Revenue Forecasts Match The High P/S Ratio?

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

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 22%. Even so, admirably revenue has lifted 181% in aggregate from three years ago, notwithstanding the last 12 months. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been more than adequate for the company.

In contrast to the company, the rest of the industry is expected to decline by 1.1% over the next year, which puts the company's recent medium-term positive growth rates in a good light for now.

With this in mind, it's clear to us why Souken Ace's P/S exceeds that of its industry peers. Investors are willing to pay more for a stock they hope will buck the trend of the broader industry going backwards. Nonetheless, with most other businesses facing an uphill battle, staying on its current revenue path is no certainty.

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

Shares in Souken Ace have seen a strong upwards swing lately, which has really helped boost its P/S figure. 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.

As we suspected, our examination of Souken Ace revealed its growing revenue over the medium-term is helping prop up its high P/S compared to its peers, given the industry is set to shrink. It could be said that investors feel this revenue growth will continue into the future, justifying a higher P/S ratio. 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.

You should always think about risks. Case in point, we've spotted 4 warning signs for Souken Ace you should be aware of, and 3 of them are a bit unpleasant.

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.