Kimuratan Corporation (TSE:8107) Stock Rockets 38% As Investors Are Less Pessimistic Than Expected

Kimuratan Corporation (TSE:8107) shareholders would be excited to see that the share price has had a great month, posting a 38% gain and recovering from prior weakness. The annual gain comes to 122% following the latest surge, making investors sit up and take notice.

Following the firm bounce in price, when almost half of the companies in Japan's Luxury industry have price-to-sales ratios (or "P/S") below 0.6x, you may consider Kimuratan as a stock not worth researching with its 6.1x 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.

View our latest analysis for Kimuratan

How Kimuratan Has Been Performing

Revenue has risen firmly for Kimuratan recently, which is pleasing to see. Perhaps the market is expecting this decent revenue performance to beat out the industry over the near term, which has kept the P/S propped up. If not, then existing shareholders may be a little nervous about the viability of the share price.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Kimuratan's earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For Kimuratan?

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

Taking a look back first, we see that the company grew revenue by an impressive 24% last year. Still, revenue has fallen 61% in total from three years ago, which is quite disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 10% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

In light of this, it's alarming that Kimuratan's P/S sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

The Key Takeaway

Kimuratan's P/S has grown nicely over the last month thanks to a handy boost in the share price. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Kimuratan currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You should always think about risks. Case in point, we've spotted 2 warning signs for Kimuratan you should be aware of, and 1 of them doesn't sit too well with us.

If you're unsure about the strength of Kimuratan's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.