Optimistic Investors Push R. C. Core Co., Ltd. (TSE:7837) Shares Up 32% But Growth Is Lacking

R. C. Core Co., Ltd. (TSE:7837) shareholders have had their patience rewarded with a 32% share price jump in the last month. Unfortunately, despite the strong performance over the last month, the full year gain of 9.9% isn't as attractive.

In spite of the firm bounce in price, you could still be forgiven for feeling indifferent about R. C. Core's P/S ratio of 0.2x, since the median price-to-sales (or "P/S") ratio for the Consumer Durables industry in Japan is also close to 0.5x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

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Check out our latest analysis for R. C. Core

How Has R. C. Core Performed Recently?

Revenue has risen at a steady rate over the last year for R. C. Core, 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. Those who are bullish on R. C. Core will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

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Do Revenue Forecasts Match The P/S Ratio?

There's an inherent assumption that a company should be matching the industry for P/S ratios like R. C. Core's to be considered reasonable.

If we review the last year of revenue growth, the company posted a worthy increase of 3.4%. Still, lamentably revenue has fallen 27% in aggregate from three years ago, which is disappointing. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for a contraction of 3.8% shows the industry is more attractive on an annualised basis regardless.

In light of this, it's somewhat peculiar that R. C. Core's P/S sits in line with the majority of other companies. With revenue going quickly in reverse, it's not guaranteed that the P/S has found a floor yet. There's potential for the P/S to fall to lower levels if the company doesn't improve its top-line growth, which would be difficult to do with the current industry outlook.

The Final Word

R. C. Core's stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of R. C. Core revealed its sharp three-year contraction in revenue isn't impacting its P/S as much as we would have predicted, given the industry is set to shrink less severely. When we see below average revenue, we suspect the share price is at risk of declining, sending the moderate P/S lower. We're also cautious about the company's ability to stay its recent medium-term course and resist even greater pain to its business from the broader industry turmoil. Unless the company's relative performance improves, it's challenging to accept these prices as being reasonable.

You always need to take note of risks, for example - R. C. Core has 2 warning signs we think you should be aware of.

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.