Dream Vision Co.,Ltd.'s (TSE:3185) 38% Share Price Surge Not Quite Adding Up

The Dream Vision Co.,Ltd. (TSE:3185) share price has done very well over the last month, posting an excellent gain of 38%. Taking a wider view, although not as strong as the last month, the full year gain of 14% is also fairly reasonable.

Even after such a large jump in price, there still wouldn't be many who think Dream VisionLtd's price-to-sales (or "P/S") ratio of 0.7x is worth a mention when the median P/S in Japan's Specialty Retail industry is similar at about 0.3x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

View our latest analysis for Dream VisionLtd

What Does Dream VisionLtd's P/S Mean For Shareholders?

As an illustration, revenue has deteriorated at Dream VisionLtd over the last year, which is not ideal at all. One possibility is that the P/S is moderate because investors think the company might still do enough to be in line with the broader industry in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Dream VisionLtd will help you shine a light on its historical performance.

Do Revenue Forecasts Match The P/S Ratio?

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

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 4.2%. This means it has also seen a slide in revenue over the longer-term as revenue is down 14% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Comparing that to the industry, which is predicted to deliver 7.9% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

In light of this, it's somewhat alarming that Dream VisionLtd's P/S sits in line with the majority of other companies. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh on the share price eventually.

The Bottom Line On Dream VisionLtd's P/S

Its shares have lifted substantially and now Dream VisionLtd's P/S is back within range of the industry median. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Our look at Dream VisionLtd revealed its shrinking revenues over the medium-term haven't impacted the P/S as much as we anticipated, given the industry is set to grow. Even though it matches the industry, we're uncomfortable with the current P/S ratio, as this dismal revenue performance is unlikely to support a more positive sentiment for long. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

You should always think about risks. Case in point, we've spotted 4 warning signs for Dream VisionLtd you should be aware of, and 2 of them are a bit unpleasant.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.