Data Horizon Co.,Ltd. (TSE:3628) Held Back By Insufficient Growth Even After Shares Climb 37%

Data Horizon Co.,Ltd. (TSE:3628) shares have continued their recent momentum with a 37% gain in the last month alone. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 26% over that time.

In spite of the firm bounce in price, given about half the companies operating in Japan's Healthcare Services industry have price-to-sales ratios (or "P/S") above 2.4x, you may still consider Data HorizonLtd as an attractive investment with its 1.7x P/S ratio. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Data HorizonLtd

What Does Data HorizonLtd's Recent Performance Look Like?

For example, consider that Data HorizonLtd's financial performance has been poor lately as its revenue has been in decline. It might be that many expect the disappointing revenue performance to continue or accelerate, which has repressed the P/S. Those who are bullish on Data HorizonLtd will be hoping that this isn't the case so that they can pick up the stock at a lower valuation.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Data HorizonLtd's earnings, revenue and cash flow.

Do Revenue Forecasts Match The Low P/S Ratio?

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

Retrospectively, the last year delivered a frustrating 5.0% decrease to the company's top line. Regardless, revenue has managed to lift by a handy 23% in aggregate from three years ago, thanks to the earlier period of growth. So we can start by confirming that the company has generally done a good job of growing revenue over that time, even though it had some hiccups along the way.

This is in contrast to the rest of the industry, which is expected to grow by 21% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's understandable that Data HorizonLtd's P/S sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the wider industry.

The Bottom Line On Data HorizonLtd's P/S

Despite Data HorizonLtd's share price climbing recently, its P/S still lags most other companies. 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.

In line with expectations, Data HorizonLtd maintains its low P/S on the weakness of its recent three-year growth being lower than the wider industry forecast. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Before you settle on your opinion, we've discovered 3 warning signs for Data HorizonLtd (2 make us uncomfortable!) that you should be aware of.

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.