Further Upside For ONDECK Co., Ltd. (TSE:7360) Shares Could Introduce Price Risks After 26% Bounce

ONDECK Co., Ltd. (TSE:7360) shareholders are no doubt pleased to see that the share price has bounced 26% in the last month, although it is still struggling to make up recently lost ground. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 25% in the last twelve months.

Although its price has surged higher, it's still not a stretch to say that ONDECK's price-to-sales (or "P/S") ratio of 1.5x right now seems quite "middle-of-the-road" compared to the Capital Markets industry in Japan, where the median P/S ratio is around 1.9x. 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.

We've discovered 3 warning signs about ONDECK. View them for free.

See our latest analysis for ONDECK

How Has ONDECK Performed Recently?

Recent times have been quite advantageous for ONDECK as its revenue has been rising very briskly. It might be that many expect the strong revenue performance to wane, which has kept the share price, and thus the P/S ratio, from rising. Those who are bullish on ONDECK will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

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

Is There Some Revenue Growth Forecasted For ONDECK?

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

Retrospectively, the last year delivered an exceptional 59% gain to the company's top line. The strong recent performance means it was also able to grow revenue by 54% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenue over that time.

Weighing the recent medium-term upward revenue trajectory against the broader industry's one-year forecast for contraction of 0.5% shows it's a great look while it lasts.

With this in mind, we find it intriguing that ONDECK's P/S matches its industry peers. It looks like most investors are not convinced the company can maintain its recent positive growth rate in the face of a shrinking broader industry.

The Final Word

Its shares have lifted substantially and now ONDECK's P/S is back within range of the industry median. 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.

As mentioned previously, ONDECK currently trades on a P/S on par with the wider industry, but this is lower than expected considering its recent three-year revenue growth is beating forecasts for a struggling industry. There could be some unobserved threats to revenue preventing the P/S ratio from outpacing the industry much like its revenue performance. Perhaps there is some hesitation about the company's ability to stay its recent course and swim against the current of the broader industry turmoil. At least the risk of a price drop looks to be subdued, but investors seem to think future revenue could see some volatility.

Plus, you should also learn about these 3 warning signs we've spotted with ONDECK (including 1 which is a bit unpleasant).

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.