Revenues Not Telling The Story For RVH Inc. (TSE:6786) After Shares Rise 30%

The RVH Inc. (TSE:6786) share price has done very well over the last month, posting an excellent gain of 30%. Notwithstanding the latest gain, the annual share price return of 3.4% isn't as impressive.

Although its price has surged higher, you could still be forgiven for feeling indifferent about RVH's P/S ratio of 1x, since the median price-to-sales (or "P/S") ratio for the Consumer Services industry in Japan is also close to 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.

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Check out our latest analysis for RVH

What Does RVH's P/S Mean For Shareholders?

RVH has been doing a good job lately as it's been growing revenue at a solid pace. One possibility is that the P/S is moderate because investors think this respectable revenue growth might not be enough to outperform the broader industry in the near future. Those who are bullish on RVH will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

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

How Is RVH's Revenue Growth Trending?

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

Retrospectively, the last year delivered a decent 14% gain to the company's revenues. The latest three year period has also seen a 26% overall rise in revenue, aided somewhat by its short-term performance. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 13% shows it's noticeably less attractive.

With this information, we find it interesting that RVH is trading at a fairly similar P/S compared to the industry. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as a continuation of recent revenue trends is likely to weigh down the shares eventually.

The Final Word

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

We've established that RVH's average P/S is a bit surprising since its recent three-year growth is lower than the wider industry forecast. Right now we are uncomfortable with the P/S as this revenue performance isn't likely to support a more positive sentiment for long. If recent medium-term revenue trends continue, the probability of a share price decline will become quite substantial, placing shareholders at risk.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with RVH (at least 1 which doesn't sit too well with us), and understanding them should be part of your investment process.

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