There's Reason For Concern Over AEON Fantasy Co.,LTD.'s (TSE:4343) Massive 26% Price Jump

AEON Fantasy Co.,LTD. (TSE:4343) shares have had a really impressive month, gaining 26% after a shaky period beforehand. Unfortunately, despite the strong performance over the last month, the full year gain of 3.1% isn't as attractive.

Although its price has surged higher, it's still not a stretch to say that AEON FantasyLTD's price-to-sales (or "P/S") ratio of 0.7x right now seems quite "middle-of-the-road" compared to the Hospitality industry in Japan, where the median P/S ratio is around 0.9x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

See our latest analysis for AEON FantasyLTD

What Does AEON FantasyLTD's Recent Performance Look Like?

AEON FantasyLTD could be doing better as it's been growing revenue less than most other companies lately. One possibility is that the P/S ratio is moderate because investors think this lacklustre revenue performance will turn around. However, if this isn't the case, investors might get caught out paying too much for the stock.

Keen to find out how analysts think AEON FantasyLTD's future stacks up against the industry? In that case, our free report is a great place to start.

How Is AEON FantasyLTD's Revenue Growth Trending?

The only time you'd be comfortable seeing a P/S like AEON FantasyLTD's is when the company's growth is tracking the industry closely.

If we review the last year of revenue growth, the company posted a worthy increase of 8.1%. The latest three year period has also seen an excellent 46% overall rise in revenue, aided somewhat by its short-term performance. So we can start by confirming that the company has done a great job of growing revenues over that time.

Shifting to the future, estimates from the three analysts covering the company suggest revenue should grow by 3.8% each year over the next three years. Meanwhile, the rest of the industry is forecast to expand by 8.6% per annum, which is noticeably more attractive.

With this information, we find it interesting that AEON FantasyLTD is trading at a fairly similar P/S compared to the industry. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

What We Can Learn From AEON FantasyLTD's P/S?

AEON FantasyLTD appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in 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.

Our look at the analysts forecasts of AEON FantasyLTD's revenue prospects has shown that its inferior revenue outlook isn't negatively impacting its P/S as much as we would have predicted. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

We don't want to rain on the parade too much, but we did also find 3 warning signs for AEON FantasyLTD that you need to be mindful of.

If these risks are making you reconsider your opinion on AEON FantasyLTD, 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.