Denka Company Limited (TSE:4061) Not Flying Under The Radar

It's not a stretch to say that Denka Company Limited's (TSE:4061) price-to-sales (or "P/S") ratio of 0.5x right now seems quite "middle-of-the-road" for companies in the Chemicals industry in Japan, where the median P/S ratio is around 0.6x. 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.

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See our latest analysis for Denka

How Has Denka Performed Recently?

Recent times haven't been great for Denka as its revenue has been rising slower than most other companies. It might be that many expect the uninspiring revenue performance to strengthen positively, which has kept the P/S ratio from falling. However, if this isn't the case, investors might get caught out paying too much for the stock.

Keen to find out how analysts think Denka's future stacks up against the industry? In that case, our free report is a great place to start.

Do Revenue Forecasts Match The P/S Ratio?

In order to justify its P/S ratio, Denka would need to produce growth that's similar to the industry.

If we review the last year of revenue, the company posted a result that saw barely any deviation from a year ago. The longer-term trend has been no better as the company has no revenue growth to show for over the last three years either. Therefore, it's fair to say that revenue growth has definitely eluded the company recently.

Turning to the outlook, the next year should generate growth of 2.0% as estimated by the six analysts watching the company. That's shaping up to be similar to the 1.9% growth forecast for the broader industry.

In light of this, it's understandable that Denka's P/S sits in line with the majority of other companies. It seems most investors are expecting to see average future growth and are only willing to pay a moderate amount for the stock.

What We Can Learn From Denka's P/S?

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.

A Denka's P/S seems about right to us given the knowledge that analysts are forecasting a revenue outlook that is similar to the Chemicals industry. Right now shareholders are comfortable with the P/S as they are quite confident future revenue won't throw up any surprises. Unless these conditions change, they will continue to support the share price at these levels.

Having said that, be aware Denka is showing 2 warning signs in our investment analysis, you should know about.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.