Market Might Still Lack Some Conviction On GFA Co., Ltd. (TSE:8783) Even After 29% Share Price Boost

GFA Co., Ltd. (TSE:8783) shareholders have had their patience rewarded with a 29% share price jump in the last month. But the last month did very little to improve the 52% share price decline over the last year.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about GFA's P/S ratio of 0.8x, since the median price-to-sales (or "P/S") ratio for the Hospitality industry in Japan is also close to 1.1x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

See our latest analysis for GFA

How GFA Has Been Performing

GFA certainly has been doing a great job lately as it's been growing its revenue at a really rapid pace. The P/S is probably moderate because investors think this strong revenue growth might not be enough to outperform the broader industry in the near future. If that doesn't eventuate, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on GFA will help you shine a light on its historical performance.

How Is GFA's Revenue Growth Trending?

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

Retrospectively, the last year delivered an exceptional 146% gain to the company's top line. The strong recent performance means it was also able to grow revenue by 167% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Comparing that recent medium-term revenue trajectory with the industry's one-year growth forecast of 13% shows it's noticeably more attractive.

In light of this, it's curious that GFA's P/S sits in line with the majority of other companies. It may be that most investors are not convinced the company can maintain its recent growth rates.

What We Can Learn From GFA's P/S?

Its shares have lifted substantially and now GFA's P/S is back within range of the industry median. 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 GFA currently trades on a lower than expected P/S since its recent three-year growth is higher than the wider industry forecast. There could be some unobserved threats to revenue preventing the P/S ratio from matching this positive performance. It appears some are indeed anticipating revenue instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

Having said that, be aware GFA is showing 5 warning signs in our investment analysis, and 3 of those can't be ignored.

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.