What Fujita Kanko Inc.'s (TSE:9722) 29% Share Price Gain Is Not Telling You

Fujita Kanko Inc. (TSE:9722) shareholders have had their patience rewarded with a 29% share price jump in the last month. The annual gain comes to 133% following the latest surge, making investors sit up and take notice.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about Fujita Kanko's P/S ratio of 1.4x, since the median price-to-sales (or "P/S") ratio for the Hospitality industry in Japan is also close to 1.1x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

See our latest analysis for Fujita Kanko

What Does Fujita Kanko's Recent Performance Look Like?

With revenue growth that's superior to most other companies of late, Fujita Kanko has been doing relatively well. It might be that many expect the strong revenue performance to wane, which has kept the P/S ratio from rising. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Fujita Kanko.

Do Revenue Forecasts Match The P/S Ratio?

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

Taking a look back first, we see that the company grew revenue by an impressive 48% last year. Pleasingly, revenue has also lifted 142% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 4.2% per annum during the coming three years according to the sole analyst following the company. With the industry predicted to deliver 8.6% growth per year, the company is positioned for a weaker revenue result.

With this information, we find it interesting that Fujita Kanko 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. These shareholders may be setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

What Does Fujita Kanko's P/S Mean For Investors?

Fujita Kanko'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 the analysts forecasts of Fujita Kanko'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.

Before you take the next step, you should know about the 3 warning signs for Fujita Kanko (1 is a bit concerning!) that we have uncovered.

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