Shingakukai Holdings Co.,Ltd.'s (TSE:9760) 26% Share Price Surge Not Quite Adding Up

The Shingakukai Holdings Co.,Ltd. (TSE:9760) share price has done very well over the last month, posting an excellent gain of 26%. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 4.7% over the last year.

Even after such a large jump in price, it's still not a stretch to say that Shingakukai HoldingsLtd's price-to-sales (or "P/S") ratio of 0.7x right now seems quite "middle-of-the-road" compared to the Consumer Services industry in Japan, where the median P/S ratio is around 0.9x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

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View our latest analysis for Shingakukai HoldingsLtd

How Has Shingakukai HoldingsLtd Performed Recently?

Shingakukai HoldingsLtd has been doing a good job lately as it's been growing revenue at a solid pace. It might be that many expect the respectable revenue performance to wane, which has kept the P/S from rising. Those who are bullish on Shingakukai HoldingsLtd will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

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Is There Some Revenue Growth Forecasted For Shingakukai HoldingsLtd?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Shingakukai HoldingsLtd's to be considered reasonable.

If we review the last year of revenue growth, the company posted a terrific increase of 24%. Still, revenue has fallen 62% in total from three years ago, which is quite disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenues over that time.

Comparing that to the industry, which is predicted to deliver 13% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this information, we find it concerning that Shingakukai HoldingsLtd 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. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

The Final Word

Shingakukai HoldingsLtd's stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our look at Shingakukai HoldingsLtd 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.

Before you take the next step, you should know about the 1 warning sign for Shingakukai HoldingsLtd that we have uncovered.

If you're unsure about the strength of Shingakukai HoldingsLtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.