Improved Revenues Required Before IMAGICA GROUP Inc. (TSE:6879) Stock's 55% Jump Looks Justified

IMAGICA GROUP Inc. (TSE:6879) shareholders have had their patience rewarded with a 55% share price jump in the last month. Looking back a bit further, it's encouraging to see the stock is up 49% in the last year.

Although its price has surged higher, it would still be understandable if you think IMAGICA GROUP is a stock with good investment prospects with a price-to-sales ratios (or "P/S") of 0.4x, considering almost half the companies in Japan's Entertainment industry have P/S ratios above 1.2x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

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What Does IMAGICA GROUP's P/S Mean For Shareholders?

IMAGICA GROUP has been doing a reasonable job lately as its revenue hasn't declined as much as most other companies. It might be that many expect the comparatively superior revenue performance to degrade substantially, which has repressed the P/S. If you still like the company, you'd want its revenue trajectory to turn around before making any decisions. But at the very least, you'd be hoping that revenue doesn't fall off a cliff completely if your plan is to pick up some stock while it's out of favour.

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Do Revenue Forecasts Match The Low P/S Ratio?

The only time you'd be truly comfortable seeing a P/S as low as IMAGICA GROUP's is when the company's growth is on track to lag the industry.

Retrospectively, the last year delivered a frustrating 2.8% decrease to the company's top line. That put a dampener on the good run it was having over the longer-term as its three-year revenue growth is still a noteworthy 21% in total. So we can start by confirming that the company has generally done a good job of growing revenue over that time, even though it had some hiccups along the way.

Shifting to the future, estimates from the two analysts covering the company suggest revenue growth is heading into negative territory, declining 1.7% over the next year. Meanwhile, the broader industry is forecast to expand by 43%, which paints a poor picture.

With this in consideration, we find it intriguing that IMAGICA GROUP's P/S is closely matching its industry peers. However, shrinking revenues are unlikely to lead to a stable P/S over the longer term. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

The Key Takeaway

The latest share price surge wasn't enough to lift IMAGICA GROUP's P/S close to the industry median. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

It's clear to see that IMAGICA GROUP maintains its low P/S on the weakness of its forecast for sliding revenue, as expected. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

You always need to take note of risks, for example - IMAGICA GROUP has 2 warning signs we think you should be aware of.

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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.