There's No Escaping Sumitomo Pharma Co., Ltd.'s (TSE:4506) Muted Revenues Despite A 26% Share Price Rise

Sumitomo Pharma Co., Ltd. (TSE:4506) shares have continued their recent momentum with a 26% gain in the last month alone. Taking a wider view, although not as strong as the last month, the full year gain of 17% is also fairly reasonable.

In spite of the firm bounce in price, Sumitomo Pharma may still be sending buy signals at present with its price-to-sales (or "P/S") ratio of 0.7x, considering almost half of all companies in the Pharmaceuticals industry in Japan have P/S ratios greater than 2x and even P/S higher than 5x aren't out of the ordinary. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

See our latest analysis for Sumitomo Pharma

How Sumitomo Pharma Has Been Performing

While the industry has experienced revenue growth lately, Sumitomo Pharma's revenue has gone into reverse gear, which is not great. Perhaps the P/S remains low as investors think the prospects of strong revenue growth aren't on the horizon. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Sumitomo Pharma.

What Are Revenue Growth Metrics Telling Us About The Low P/S?

In order to justify its P/S ratio, Sumitomo Pharma would need to produce sluggish growth that's trailing the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 30%. The last three years don't look nice either as the company has shrunk revenue by 36% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Turning to the outlook, the next three years should generate growth of 4.1% each year as estimated by the eight analysts watching the company. That's shaping up to be materially lower than the 6.4% each year growth forecast for the broader industry.

With this information, we can see why Sumitomo Pharma is trading at a P/S lower than the industry. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Final Word

Sumitomo Pharma's stock price has surged recently, but its but its P/S still remains modest. 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.

As we suspected, our examination of Sumitomo Pharma's analyst forecasts revealed that its inferior revenue outlook is contributing to its low P/S. Shareholders' pessimism on the revenue prospects for the company seems to be the main contributor to the depressed P/S. It's hard to see the share price rising strongly in the near future under these circumstances.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Sumitomo Pharma (1 shouldn't be ignored) you should be aware of.

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.