Improved Revenues Required Before 3-D Matrix, Ltd. (TSE:7777) Stock's 27% Jump Looks Justified

3-D Matrix, Ltd. (TSE:7777) shareholders are no doubt pleased to see that the share price has bounced 27% in the last month, although it is still struggling to make up recently lost ground. Longer-term shareholders would be thankful for the recovery in the share price since it's now virtually flat for the year after the recent bounce.

In spite of the firm bounce in price, 3-D Matrix may still look like a strong buying opportunity at present with its price-to-sales (or "P/S") ratio of 2.6x, considering almost half of all companies in the Biotechs industry in Japan have P/S ratios greater than 16.2x and even P/S higher than 85x aren't out of the ordinary. However, the P/S might be quite low for a reason and it requires further investigation to determine if it's justified.

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Check out our latest analysis for 3-D Matrix

How Has 3-D Matrix Performed Recently?

3-D Matrix certainly has been doing a great job lately as it's been growing its revenue at a really rapid pace. Perhaps the market is expecting future revenue performance to dwindle, which has kept the P/S suppressed. If you 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 earnings, revenue and cash flow for the company? Then our free report on 3-D Matrix will help you shine a light on its historical performance.

Is There Any Revenue Growth Forecasted For 3-D Matrix?

There's an inherent assumption that a company should far underperform the industry for P/S ratios like 3-D Matrix's to be considered reasonable.

Taking a look back first, we see that the company grew revenue by an impressive 78% last year. This great performance means it was also able to deliver immense revenue growth over the last three years. So we can start by confirming that the company has done a tremendous job of growing revenue over that time.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 97% shows it's noticeably less attractive.

With this in consideration, it's easy to understand why 3-D Matrix's P/S falls short of the mark set by its industry peers. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

What Does 3-D Matrix's P/S Mean For Investors?

Even after such a strong price move, 3-D Matrix's P/S still trails the rest of the industry. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of 3-D Matrix revealed its three-year revenue trends are contributing to its low P/S, given they look worse than current industry expectations. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. If recent medium-term revenue trends continue, it's hard to see the share price experience a reversal of fortunes anytime soon.

We don't want to rain on the parade too much, but we did also find 3 warning signs for 3-D Matrix (1 is a bit concerning!) that you need to be mindful of.

If you're unsure about the strength of 3-D Matrix's 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.