Johnan Academic Preparatory Institute, Inc.'s (TSE:4720) 33% Price Boost Is Out Of Tune With Revenues

The Johnan Academic Preparatory Institute, Inc. (TSE:4720) share price has done very well over the last month, posting an excellent gain of 33%. Looking further back, the 17% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

Even after such a large jump in price, it's still not a stretch to say that Johnan Academic Preparatory Institute's price-to-sales (or "P/S") ratio of 0.4x right now seems quite "middle-of-the-road" compared to the Consumer Services industry in Japan, where the median P/S ratio is around 0.7x. 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.

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Check out our latest analysis for Johnan Academic Preparatory Institute

What Does Johnan Academic Preparatory Institute's Recent Performance Look Like?

For example, consider that Johnan Academic Preparatory Institute's financial performance has been poor lately as its revenue has been in decline. One possibility is that the P/S is moderate because investors think the company might still do enough to be in line with the broader industry in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.

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

How Is Johnan Academic Preparatory Institute's Revenue Growth Trending?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Johnan Academic Preparatory Institute'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 1.2%. As a result, revenue from three years ago have also fallen 6.9% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 9.8% shows it's an unpleasant look.

With this information, we find it concerning that Johnan Academic Preparatory Institute is trading at a fairly similar P/S compared to the industry. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh on the share price eventually.

The Key Takeaway

Johnan Academic Preparatory Institute's stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. 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.

Our look at Johnan Academic Preparatory Institute revealed its shrinking revenues over the medium-term haven't impacted the P/S as much as we anticipated, given the industry is set to grow. Even though it matches the industry, we're uncomfortable with the current P/S ratio, as this dismal revenue performance is unlikely to support a more positive sentiment for long. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

It is also worth noting that we have found 2 warning signs for Johnan Academic Preparatory Institute (1 doesn't sit too well with us!) that you need to take into consideration.

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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.