Daito Chemix Corporation (TSE:4366) Soars 26% But It's A Story Of Risk Vs Reward

Daito Chemix Corporation (TSE:4366) shares have continued their recent momentum with a 26% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 46% in the last year.

In spite of the firm bounce in price, there still wouldn't be many who think Daito Chemix's price-to-sales (or "P/S") ratio of 0.5x is worth a mention when the median P/S in Japan's Chemicals industry is similar at about 0.6x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

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View our latest analysis for Daito Chemix

What Does Daito Chemix's Recent Performance Look Like?

Daito Chemix has been doing a good job lately as it's been growing revenue at a solid pace. It might be that many expect the respectable revenue performance to wane, which has kept the P/S from rising. Those who are bullish on Daito Chemix will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

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

What Are Revenue Growth Metrics Telling Us About The P/S?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Daito Chemix's to be considered reasonable.

Retrospectively, the last year delivered a decent 13% gain to the company's revenues. Revenue has also lifted 17% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

Comparing that to the industry, which is only predicted to deliver 2.7% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised revenue results.

With this information, we find it interesting that Daito Chemix is trading at a fairly similar P/S compared to the industry. It may be that most investors are not convinced the company can maintain its recent growth rates.

What Does Daito Chemix's P/S Mean For Investors?

Daito Chemix appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry 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.

We've established that Daito Chemix currently trades on a lower than expected P/S since its recent three-year growth is higher than the wider industry forecast. When we see strong revenue with faster-than-industry growth, we can only assume potential risks are what might be placing pressure on the P/S ratio. At least the risk of a price drop looks to be subdued if recent medium-term revenue trends continue, but investors seem to think future revenue could see some volatility.

You need to take note of risks, for example - Daito Chemix has 3 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

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.