Investors Appear Satisfied With Sumitomo Pharma Co., Ltd.'s (TSE:4506) Prospects As Shares Rocket 38%

Despite an already strong run, Sumitomo Pharma Co., Ltd. (TSE:4506) shares have been powering on, with a gain of 38% in the last thirty days. The last month tops off a massive increase of 300% in the last year.

Even after such a large jump in price, it's still not a stretch to say that Sumitomo Pharma's price-to-sales (or "P/S") ratio of 2.1x right now seems quite "middle-of-the-road" compared to the Pharmaceuticals industry in Japan, where the median P/S ratio is around 1.7x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

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See our latest analysis for Sumitomo Pharma

How Has Sumitomo Pharma Performed Recently?

Sumitomo Pharma certainly has been doing a good job lately as it's been growing revenue more than most other companies. It might be that many expect the strong revenue performance to wane, which has kept the P/S ratio from rising. If the company manages to stay the course, then investors should be rewarded with a share price that matches its revenue figures.

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Is There Some Revenue Growth Forecasted For Sumitomo Pharma?

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

Retrospectively, the last year delivered an exceptional 30% gain to the company's top line. However, this wasn't enough as the latest three year period has seen the company endure a nasty 24% drop in revenue in aggregate. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Shifting to the future, estimates from the six analysts covering the company suggest revenue should grow by 4.8% each year over the next three years. That's shaping up to be similar to the 4.5% per year growth forecast for the broader industry.

With this information, we can see why Sumitomo Pharma is trading at a fairly similar P/S to the industry. It seems most investors are expecting to see average future growth and are only willing to pay a moderate amount for the stock.

The Key Takeaway

Sumitomo Pharma's stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. 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.

We've seen that Sumitomo Pharma maintains an adequate P/S seeing as its revenue growth figures match the rest of the industry. At this stage investors feel the potential for an improvement or deterioration in revenue isn't great enough to push P/S in a higher or lower direction. Unless these conditions change, they will continue to support the share price at these levels.

Before you take the next step, you should know about the 4 warning signs for Sumitomo Pharma that we have uncovered.

If these risks are making you reconsider your opinion on Sumitomo Pharma, 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.