Revenues Not Telling The Story For Shochiku Co., Ltd. (TSE:9601)

When close to half the companies in the Entertainment industry in Japan have price-to-sales ratios (or "P/S") below 1.2x, you may consider Shochiku Co., Ltd. (TSE:9601) as a stock to potentially avoid with its 2.1x 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.

Our free stock report includes 1 warning sign investors should be aware of before investing in Shochiku. Read for free now.

See our latest analysis for Shochiku

What Does Shochiku's P/S Mean For Shareholders?

Recent times have been more advantageous for Shochiku as its revenue hasn't fallen as much as the rest of the industry. Perhaps the market is expecting the company to continue to outperform the industry, which has propped up the P/S. While you'd prefer that its revenue trajectory turned around, you'd at least be hoping it remains less negative than other companies, otherwise you're paying a pretty hefty price for no particular reason.

Keen to find out how analysts think Shochiku's future stacks up against the industry? In that case, our free report is a great place to start.

Do Revenue Forecasts Match The High P/S Ratio?

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

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 1.7%. 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 17% 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.

Looking ahead now, revenue is anticipated to climb by 0.9% during the coming year according to the two analysts following the company. With the industry predicted to deliver 46% growth, the company is positioned for a weaker revenue result.

With this information, we find it concerning that Shochiku is trading at a P/S higher than the industry. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

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

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 comes as a surprise to see Shochiku trade at such a high P/S given the revenue forecasts look less than stellar. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

It is also worth noting that we have found 1 warning sign for Shochiku that you need to take into consideration.

If you're unsure about the strength of Shochiku's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.