DLE Inc.'s (TSE:3686) 29% Price Boost Is Out Of Tune With Revenues

DLE Inc. (TSE:3686) shares have had a really impressive month, gaining 29% after a shaky period beforehand. Taking a wider view, although not as strong as the last month, the full year gain of 18% is also fairly reasonable.

Following the firm bounce in price, given around half the companies in Japan's Media industry have price-to-sales ratios (or "P/S") below 0.9x, you may consider DLE as a stock to avoid entirely with its 3.5x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

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See our latest analysis for DLE

How Has DLE Performed Recently?

As an illustration, revenue has deteriorated at DLE over the last year, which is not ideal at all. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

How Is DLE's Revenue Growth Trending?

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

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 2.9%. This means it has also seen a slide in revenue over the longer-term as revenue is down 3.7% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 6.4% shows it's an unpleasant look.

With this in mind, we find it worrying that DLE's P/S exceeds that of its industry peers. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

What Does DLE's P/S Mean For Investors?

Shares in DLE have seen a strong upwards swing lately, which has really helped boost its P/S figure. 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 examination of DLE revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You need to take note of risks, for example - DLE has 3 warning signs (and 1 which is a bit concerning) 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.