Aizawa Securities Group Co., Ltd.'s (TSE:8708) Shares Climb 26% But Its Business Is Yet to Catch Up

Aizawa Securities Group Co., Ltd. (TSE:8708) shares have continued their recent momentum with a 26% gain in the last month alone. The last month tops off a massive increase of 173% in the last year.

Following the firm bounce in price, when almost half of the companies in Japan's Capital Markets industry have price-to-sales ratios (or "P/S") below 2x, you may consider Aizawa Securities Group as a stock probably not worth researching with its 3.7x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Aizawa Securities Group

How Aizawa Securities Group Has Been Performing

With revenue growth that's exceedingly strong of late, Aizawa Securities Group has been doing very well. It seems that many are expecting the strong revenue performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

Do Revenue Forecasts Match The High P/S Ratio?

In order to justify its P/S ratio, Aizawa Securities Group would need to produce impressive growth in excess of the industry.

Taking a look back first, we see that the company grew revenue by an impressive 49% last year. The latest three year period has also seen a 11% overall rise in revenue, aided extensively 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.

This is in contrast to the rest of the industry, which is expected to grow by 6.5% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it concerning that Aizawa Securities Group is trading at a P/S higher than the industry. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. 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 recent growth rates.

The Key Takeaway

Aizawa Securities Group shares have taken a big step in a northerly direction, but its P/S is elevated as a result. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Our examination of Aizawa Securities Group revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. When we see slower than industry revenue growth but an elevated P/S, there's considerable risk of the share price declining, sending the P/S lower. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Having said that, be aware Aizawa Securities Group is showing 4 warning signs in our investment analysis, and 2 of those can't be ignored.

If these risks are making you reconsider your opinion on Aizawa Securities Group, 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.