Market Cool On Sumitomo Pharma Co., Ltd.'s (TSE:4506) Revenues

You may think that with a price-to-sales (or "P/S") ratio of 0.5x Sumitomo Pharma Co., Ltd. (TSE:4506) is a stock worth checking out, seeing as almost half of all the Pharmaceuticals companies in Japan have P/S ratios greater than 2x and even P/S higher than 5x aren't out of the ordinary. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

View our latest analysis for Sumitomo Pharma

What Does Sumitomo Pharma's Recent Performance Look Like?

Sumitomo Pharma hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. The P/S ratio is probably low because investors think this poor revenue performance isn't going to get any better. If you still like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Want the full picture on analyst estimates for the company? Then our free report on Sumitomo Pharma will help you uncover what's on the horizon.

Is There Any Revenue Growth Forecasted For Sumitomo Pharma?

Sumitomo Pharma's P/S ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 44%. The last three years don't look nice either as the company has shrunk revenue by 37% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Shifting to the future, estimates from the seven analysts covering the company suggest revenue should grow by 8.7% per annum over the next three years. That's shaping up to be materially higher than the 5.9% each year growth forecast for the broader industry.

In light of this, it's peculiar that Sumitomo Pharma's P/S sits below the majority of other companies. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

The Final Word

Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

To us, it seems Sumitomo Pharma currently trades on a significantly depressed P/S given its forecasted revenue growth is higher than the rest of its industry. The reason for this depressed P/S could potentially be found in the risks the market is pricing in. While the possibility of the share price plunging seems unlikely due to the high growth forecasted for the company, the market does appear to have some hesitation.

Having said that, be aware Sumitomo Pharma is showing 2 warning signs in our investment analysis, and 1 of those is a bit concerning.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.