There's No Escaping and factory,inc.'s (TSE:7035) Muted Revenues

When close to half the companies operating in the Entertainment industry in Japan have price-to-sales ratios (or "P/S") above 1.3x, you may consider and factory,inc. (TSE:7035) as an attractive investment with its 0.4x P/S ratio. 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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View our latest analysis for and factoryinc

What Does and factoryinc's P/S Mean For Shareholders?

With revenue growth that's exceedingly strong of late, and factoryinc has been doing very well. It might be that many expect the strong revenue performance to degrade substantially, which has repressed the P/S ratio. Those who are bullish on and factoryinc will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

Although there are no analyst estimates available for and factoryinc, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is and factoryinc's Revenue Growth Trending?

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

Taking a look back first, we see that the company grew revenue by an impressive 54% last year. The strong recent performance means it was also able to grow revenue by 63% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenue over that time.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 25% shows it's noticeably less attractive.

In light of this, it's understandable that and factoryinc'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 Does and factoryinc's P/S Mean For Investors?

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.

As we suspected, our examination of and factoryinc revealed its three-year revenue trends are contributing to its low P/S, given they look worse than current industry expectations. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Before you take the next step, you should know about the 2 warning signs for and factoryinc that we have uncovered.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.