Why Investors Shouldn't Be Surprised By True Data Inc.'s (TSE:4416) P/S

It's not a stretch to say that True Data Inc.'s (TSE:4416) price-to-sales (or "P/S") ratio of 1.6x seems quite "middle-of-the-road" for Interactive Media and Services companies in Japan, seeing as it matches the P/S ratio of the wider industry. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

See our latest analysis for True Data

What Does True Data's Recent Performance Look Like?

Revenue has risen firmly for True Data recently, which is pleasing to see. Perhaps the market is expecting future revenue performance to only keep up with the broader industry, which has keeping the P/S in line with expectations. Those who are bullish on True Data will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

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

What Are Revenue Growth Metrics Telling Us About The P/S?

The only time you'd be comfortable seeing a P/S like True Data's is when the company's growth is tracking the industry closely.

Retrospectively, the last year delivered a decent 11% gain to the company's revenues. Pleasingly, revenue has also lifted 35% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

It's interesting to note that the rest of the industry is similarly expected to grow by 12% over the next year, which is fairly even with the company's recent medium-term annualised growth rates.

With this information, we can see why True Data is trading at a fairly similar P/S to the industry. Apparently shareholders are comfortable to simply hold on assuming the company will continue keeping a low profile.

The Final Word

While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

It appears to us that True Data maintains its moderate P/S off the back of its recent three-year growth being in line with the wider industry forecast. Currently, with a past revenue trend that aligns closely wit the industry outlook, shareholders are confident the company's future revenue outlook won't contain any major surprises. Unless the recent medium-term conditions change, they will continue to support the share price at these levels.

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

If these risks are making you reconsider your opinion on True Data, 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.