Sagami Rubber Industries Co., Ltd.'s (TSE:5194) Shares May Have Run Too Fast Too Soon

When close to half the companies in the Personal Products industry in Japan have price-to-sales ratios (or "P/S") below 1.1x, you may consider Sagami Rubber Industries Co., Ltd. (TSE:5194) as a stock to potentially avoid with its 1.9x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

Our free stock report includes 3 warning signs investors should be aware of before investing in Sagami Rubber Industries. Read for free now.

Check out our latest analysis for Sagami Rubber Industries

What Does Sagami Rubber Industries' Recent Performance Look Like?

For example, consider that Sagami Rubber Industries' financial performance has been poor lately as its revenue has been in decline. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. However, if this isn't the case, investors might get caught out paying too much for the stock.

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 Sagami Rubber Industries' earnings, revenue and cash flow.

How Is Sagami Rubber Industries' Revenue Growth Trending?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Sagami Rubber Industries' to be considered reasonable.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 9.9%. Unfortunately, that's brought it right back to where it started three years ago with revenue growth being virtually non-existent overall during that time. Therefore, it's fair to say that revenue growth has been inconsistent recently for the company.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 4.2% shows it's noticeably less attractive.

With this in mind, we find it worrying that Sagami Rubber Industries' P/S exceeds that of its industry peers. 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. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

The Final Word

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.

The fact that Sagami Rubber Industries currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. Right now we aren't comfortable with the high P/S as this revenue performance isn't likely to support such positive sentiment for long. 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.

It is also worth noting that we have found 3 warning signs for Sagami Rubber Industries (2 don't sit too well with us!) that you need to take into consideration.

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.