What AltPlus Inc.'s (TSE:3672) 33% Share Price Gain Is Not Telling You

Despite an already strong run, AltPlus Inc. (TSE:3672) shares have been powering on, with a gain of 33% in the last thirty days. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 7.0% over the last year.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about AltPlus' P/S ratio of 1.4x, since the median price-to-sales (or "P/S") ratio for the Entertainment industry in Japan is also close to 1.3x. 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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View our latest analysis for AltPlus

What Does AltPlus' P/S Mean For Shareholders?

As an illustration, revenue has deteriorated at AltPlus over the last year, which is not ideal at all. It might be that many expect the company to put the disappointing revenue performance behind them over the coming period, which has kept the P/S from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.

Although there are no analyst estimates available for AltPlus, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is AltPlus' Revenue Growth Trending?

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

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 23%. The last three years don't look nice either as the company has shrunk revenue by 54% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

In contrast to the company, the rest of the industry is expected to grow by 32% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this information, we find it concerning that AltPlus is trading at a fairly similar P/S compared to the industry. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

The Bottom Line On AltPlus' P/S

Its shares have lifted substantially and now AltPlus' P/S is back within range of the industry median. 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.

Our look at AltPlus revealed its shrinking revenues over the medium-term haven't impacted the P/S as much as we anticipated, given the industry is set to grow. When we see revenue heading backwards in the context of growing industry forecasts, it'd make sense to expect a possible share price decline on the horizon, sending the moderate P/S lower. If recent medium-term revenue trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

We don't want to rain on the parade too much, but we did also find 4 warning signs for AltPlus (3 shouldn't be ignored!) that you need to be mindful of.

If you're unsure about the strength of AltPlus' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.