After Leaping 27% Drecom Co.,Ltd. (TSE:3793) Shares Are Not Flying Under The Radar

Despite an already strong run, Drecom Co.,Ltd. (TSE:3793) shares have been powering on, with a gain of 27% in the last thirty days. Unfortunately, despite the strong performance over the last month, the full year gain of 9.7% isn't as attractive.

Since its price has surged higher, given close to half the companies operating in Japan's Entertainment industry have price-to-sales ratios (or "P/S") below 1.2x, you may consider DrecomLtd as a stock to potentially avoid with its 2.9x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

See our latest analysis for DrecomLtd

What Does DrecomLtd's Recent Performance Look Like?

DrecomLtd certainly has been doing a good job lately as its revenue growth has been positive while most other companies have been seeing their revenue go backwards. It seems that many are expecting the company to continue defying the broader industry adversity, which has increased investors’ willingness to pay up for the stock. However, if this isn't the case, investors might get caught out paying too much for the stock.

Want the full picture on analyst estimates for the company? Then our free report on DrecomLtd will help you uncover what's on the horizon.

Is There Enough Revenue Growth Forecasted For DrecomLtd?

The only time you'd be truly comfortable seeing a P/S as high as DrecomLtd's is when the company's growth is on track to outshine the industry.

Retrospectively, the last year delivered a decent 2.8% gain to the company's revenues. Ultimately though, it couldn't turn around the poor performance of the prior period, with revenue shrinking 3.9% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Looking ahead now, revenue is anticipated to climb by 76% during the coming year according to the one analyst following the company. With the industry only predicted to deliver 25%, the company is positioned for a stronger revenue result.

In light of this, it's understandable that DrecomLtd's P/S sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What We Can Learn From DrecomLtd's P/S?

The large bounce in DrecomLtd's shares has lifted the company's P/S handsomely. 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.

Our look into DrecomLtd shows that its P/S ratio remains high on the merit of its strong future revenues. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. It's hard to see the share price falling strongly in the near future under these circumstances.

Having said that, be aware DrecomLtd is showing 1 warning sign in our investment analysis, you should know about.

If these risks are making you reconsider your opinion on DrecomLtd, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.