Revenues Not Telling The Story For JCR Pharmaceuticals Co., Ltd. (TSE:4552) After Shares Rise 36%

JCR Pharmaceuticals Co., Ltd. (TSE:4552) shareholders would be excited to see that the share price has had a great month, posting a 36% gain and recovering from prior weakness. Unfortunately, despite the strong performance over the last month, the full year gain of 5.8% isn't as attractive.

After such a large jump in price, you could be forgiven for thinking JCR Pharmaceuticals is a stock not worth researching with a price-to-sales ratios (or "P/S") of 2.5x, considering almost half the companies in Japan's Pharmaceuticals industry have P/S ratios below 1.8x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

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How JCR Pharmaceuticals Has Been Performing

Recent revenue growth for JCR Pharmaceuticals has been in line with the industry. One possibility is that the P/S ratio is high because investors think this modest revenue performance will accelerate. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

The only time you'd be truly comfortable seeing a P/S as high as JCR Pharmaceuticals' is when the company's growth is on track to outshine the industry.

If we review the last year of revenue growth, the company posted a worthy increase of 7.2%. However, this wasn't enough as the latest three year period has seen an unpleasant 1.3% overall drop in revenue. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Shifting to the future, estimates from the seven analysts covering the company suggest revenue growth is heading into negative territory, declining 0.9% each year over the next three years. Meanwhile, the broader industry is forecast to expand by 5.0% each year, which paints a poor picture.

With this in mind, we find it intriguing that JCR Pharmaceuticals' P/S is closely matching its industry peers. 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 these declining revenues are likely to weigh heavily on the share price eventually.

The Final Word

JCR Pharmaceuticals shares have taken a big step in a northerly direction, but its P/S is elevated as a result. 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.

We've established that JCR Pharmaceuticals currently trades on a much higher than expected P/S for a company whose revenues are forecast to decline. Right now we aren't comfortable with the high P/S as the predicted future revenue decline likely to impact the positive sentiment that's propping up the P/S. Unless these conditions improve markedly, it'll be a challenging time for shareholders.

Before you settle on your opinion, we've discovered 3 warning signs for JCR Pharmaceuticals (2 are a bit unpleasant!) that you should be aware of.

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

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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.