Improved Revenues Required Before THECOO Inc. (TSE:4255) Stock's 46% Jump Looks Justified

THECOO Inc. (TSE:4255) shareholders have had their patience rewarded with a 46% share price jump in the last month. The annual gain comes to 120% following the latest surge, making investors sit up and take notice.

In spite of the firm bounce in price, considering around half the companies operating in Japan's Interactive Media and Services industry have price-to-sales ratios (or "P/S") above 1.8x, you may still consider THECOO as an solid investment opportunity with its 0.7x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

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View our latest analysis for THECOO

How Has THECOO Performed Recently?

Revenue has risen firmly for THECOO recently, which is pleasing to see. One possibility is that the P/S is low because investors think this respectable revenue growth might actually underperform the broader industry in the near future. If that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction of the share price.

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

Do Revenue Forecasts Match The Low P/S Ratio?

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

Retrospectively, the last year delivered an exceptional 16% gain to the company's top line. As a result, it also grew revenue by 11% in total over the last three years. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 10% shows it's noticeably less attractive.

In light of this, it's understandable that THECOO's P/S sits below the majority of other companies. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

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

THECOO's stock price has surged recently, but its but its P/S still remains modest. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

In line with expectations, THECOO maintains its low P/S on the weakness of its recent three-year growth being lower than the wider industry forecast. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

You should always think about risks. Case in point, we've spotted 2 warning signs for THECOO you should be aware of, and 1 of them doesn't sit too well with us.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.