A Look at Tokai Carbon's (TSE:5301) Valuation Following JPY 10bn Bond Issue Announcement

Tokai Carbon (TSE:5301) has set the terms for its latest major funding move, announcing a JPY 10 billion unsecured straight bond issue. The company’s strong credit ratings reflect its stable financial position and strategic approach to raising capital.

See our latest analysis for Tokai Carbon.

Tokai Carbon’s announcement comes amid a year of solid momentum. The company’s share price has climbed sharply in 2024, with a year-to-date return of nearly 20%. Its one-year total shareholder return is 30%. Recent gains suggest investor confidence has been bolstered by both strong underlying performance and proactive capital management decisions such as the new bond issue. Looking further back, the three-year total return stands at 28%, painting a picture of a stock that is not only rebounding but also building on longer-term value creation.

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Yet with shares already up nearly 20% this year and trading at a modest discount to analyst targets, the big question is whether Tokai Carbon is still undervalued or if the market has already priced in the company’s next growth phase.

Price-to-Sales of 0.7x: Is it justified?

Tokai Carbon’s shares currently trade at a price-to-sales ratio of 0.7x, which is higher than the peer group and industry average. This suggests a premium valuation even with recent momentum in the share price.

The price-to-sales ratio measures the company’s market value compared to its total revenues. For Tokai Carbon, this means investors are willing to pay 0.7 times every yen of annual sales, a figure often seen in sectors with growth expectations or perceived stability.

The key question is whether this premium is warranted. Despite forecast revenue growth slightly ahead of the broader Japanese market, recent results indicate that Tokai Carbon remains unprofitable, with losses increasing in the past five years. The company’s price-to-sales ratio is also above both its sector and peer averages. This implies that investors are expecting a turnaround or have higher future growth hopes embedded in the current stock price. Notably, this figure aligns precisely with the estimated fair price-to-sales ratio, suggesting the market is pricing Tokai Carbon at a level SWS fair value models would predict.

Explore the SWS fair ratio for Tokai Carbon

Result: Price-to-Sales of 0.7x (ABOUT RIGHT)

However, persistent unprofitability and dependence on a turnaround remain risks that could challenge the current market optimism around Tokai Carbon.

Find out about the key risks to this Tokai Carbon narrative.

Another View: Discounted Cash Flow Model

While the current price-to-sales suggests Tokai Carbon is fairly valued, the SWS DCF model offers a sharply different perspective. According to this method, the company appears significantly undervalued, with shares trading more than 35% below estimated fair value. Is the market overlooking something that the DCF picks up?

Look into how the SWS DCF model arrives at its fair value.

Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out Tokai Carbon for example). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover undervalued stocks based on their cash flows. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.

Build Your Own Tokai Carbon Narrative

If you want to challenge the consensus or simply analyze the numbers from your own angle, you can generate a unique assessment with just a few clicks: Do it your way

A great starting point for your Tokai Carbon research is our analysis highlighting 2 key rewards and 1 important warning sign that could impact your investment decision.

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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.

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