Kodama Chemical Industry Co.,Ltd.'s (TSE:4222) Shares Climb 50% But Its Business Is Yet to Catch Up

Kodama Chemical Industry Co.,Ltd. (TSE:4222) shareholders would be excited to see that the share price has had a great month, posting a 50% gain and recovering from prior weakness. Looking back a bit further, it's encouraging to see the stock is up 29% in the last year.

Even after such a large jump in price, it's still not a stretch to say that Kodama Chemical IndustryLtd's price-to-sales (or "P/S") ratio of 0.2x right now seems quite "middle-of-the-road" compared to the Chemicals industry in Japan, where the median P/S ratio is around 0.6x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

Check out our latest analysis for Kodama Chemical IndustryLtd

How Has Kodama Chemical IndustryLtd Performed Recently?

For example, consider that Kodama Chemical IndustryLtd's financial performance has been poor lately as its revenue has been in decline. Perhaps investors believe the recent revenue performance is enough to keep in line with the industry, which is keeping the P/S from dropping off. If not, then existing shareholders may be a little nervous about the viability of the share price.

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 Kodama Chemical IndustryLtd's earnings, revenue and cash flow.

Is There Some Revenue Growth Forecasted For Kodama Chemical IndustryLtd?

The only time you'd be comfortable seeing a P/S like Kodama Chemical IndustryLtd's is when the company's growth is tracking the industry closely.

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 3.2%. 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. So it appears to us that the company has had a mixed result in terms of growing revenue over that time.

Comparing that to the industry, which is predicted to deliver 6.5% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

In light of this, it's curious that Kodama Chemical IndustryLtd's P/S sits in line with the majority of other companies. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. They may be setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

What Does Kodama Chemical IndustryLtd's P/S Mean For Investors?

Kodama Chemical IndustryLtd appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

We've established that Kodama Chemical IndustryLtd's average P/S is a bit surprising since its recent three-year growth is lower than the wider industry forecast. When we see weak revenue with slower than industry growth, we suspect the share price is at risk of declining, bringing the P/S back in line with expectations. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

You should always think about risks. Case in point, we've spotted 2 warning signs for Kodama Chemical IndustryLtd you should be aware of, and 1 of them is a bit concerning.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.