With A 34% Price Drop For Convano Inc. (TSE:6574) You'll Still Get What You Pay For

To the annoyance of some shareholders, Convano Inc. (TSE:6574) shares are down a considerable 34% in the last month, which continues a horrid run for the company. Regardless, last month's decline is barely a blip on the stock's price chart as it has gained a monstrous 492% in the last year.

Even after such a large drop in price, when almost half of the companies in Japan's Consumer Services industry have price-to-sales ratios (or "P/S") below 0.7x, you may still consider Convano as a stock not worth researching with its 9.6x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

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Check out our latest analysis for Convano

How Has Convano Performed Recently?

Recent times have been quite advantageous for Convano as its revenue has been rising very briskly. It seems that many are expecting the strong revenue performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.

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

How Is Convano's Revenue Growth Trending?

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

Retrospectively, the last year delivered an exceptional 101% gain to the company's top line. The latest three year period has also seen an excellent 161% overall rise in revenue, aided by its short-term performance. Therefore, it's fair to say the revenue growth recently has been superb for the company.

This is in contrast to the rest of the industry, which is expected to grow by 9.7% over the next year, materially lower than the company's recent medium-term annualised growth rates.

In light of this, it's understandable that Convano's P/S sits above the majority of other companies. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

What Does Convano's P/S Mean For Investors?

Even after such a strong price drop, Convano's P/S still exceeds the industry median significantly. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

It's no surprise that Convano can support its high P/S given the strong revenue growth its experienced over the last three-year is superior to the current industry outlook. Right now shareholders are comfortable with the P/S as they are quite confident revenue aren't under threat. Barring any significant changes to the company's ability to make money, the share price should continue to be propped up.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Convano, and understanding them should be part of your investment process.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.