Risks To Shareholder Returns Are Elevated At These Prices For Bunkyodo Group Holdings Co., Ltd. (TSE:9978)

There wouldn't be many who think Bunkyodo Group Holdings Co., Ltd.'s (TSE:9978) price-to-sales (or "P/S") ratio of 0.2x is worth a mention when the median P/S for the Specialty Retail industry in Japan is similar at about 0.3x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

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Check out our latest analysis for Bunkyodo Group Holdings

How Has Bunkyodo Group Holdings Performed Recently?

As an illustration, revenue has deteriorated at Bunkyodo Group Holdings 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.

Although there are no analyst estimates available for Bunkyodo Group Holdings, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

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

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

Retrospectively, the last year delivered a frustrating 3.0% decrease to the company's top line. As a result, revenue from three years ago have also fallen 15% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

In contrast to the company, the rest of the industry is expected to grow by 7.2% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this in mind, we find it worrying that Bunkyodo Group Holdings' 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. 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 Key Takeaway

Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We find it unexpected that Bunkyodo Group Holdings trades at a P/S ratio that is comparable to the rest of the industry, despite experiencing declining revenues during the medium-term, while the industry as a whole is expected to grow. When we see revenue heading backwards in the context of growing industry forecasts, it'd make sense to expect a possible share price decline on the horizon, sending the moderate P/S lower. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

Don't forget that there may be other risks. For instance, we've identified 4 warning signs for Bunkyodo Group Holdings (1 makes us a bit uncomfortable) you should be aware of.

If you're unsure about the strength of Bunkyodo Group Holdings' 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.