TOP CULTURE Co.,Ltd. (TSE:7640) Shares May Have Slumped 29% But Getting In Cheap Is Still Unlikely

TOP CULTURE Co.,Ltd. (TSE:7640) shares have retraced a considerable 29% in the last month, reversing a fair amount of their solid recent performance. The last month has meant the stock is now only up 9.6% during the last year.

Even after such a large drop in price, there still wouldn't be many who think TOP CULTURELtd's price-to-sales (or "P/S") ratio of 0.1x is worth a mention when the median P/S in Japan's Specialty Retail industry is similar at about 0.4x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

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Check out our latest analysis for TOP CULTURELtd

What Does TOP CULTURELtd's P/S Mean For Shareholders?

For instance, TOP CULTURELtd's receding revenue in recent times would have to be some food for thought. It might be that many expect the company to put the disappointing revenue performance behind them over the coming period, which has kept the P/S from falling. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

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

How Is TOP CULTURELtd's Revenue Growth Trending?

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

Retrospectively, the last year delivered a frustrating 4.2% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 20% in aggregate. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Comparing that to the industry, which is predicted to deliver 8.4% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this in mind, we find it worrying that TOP CULTURELtd's P/S exceeds that of its industry peers. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

The Final Word

Following TOP CULTURELtd's share price tumble, its P/S is just clinging on to the industry median P/S. 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.

Our look at TOP CULTURELtd 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.

Plus, you should also learn about these 3 warning signs we've spotted with TOP CULTURELtd (including 2 which make us uncomfortable).

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.