Disco Corporation's (TSE:6146) 34% Share Price Surge Not Quite Adding Up

Disco Corporation (TSE:6146) shareholders have had their patience rewarded with a 34% share price jump in the last month. The annual gain comes to 218% following the latest surge, making investors sit up and take notice.

After such a large jump in price, when almost half of the companies in Japan's Semiconductor industry have price-to-sales ratios (or "P/S") below 2.1x, you may consider Disco as a stock not worth researching with its 21.9x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

View our latest analysis for Disco

What Does Disco's Recent Performance Look Like?

With revenue growth that's superior to most other companies of late, Disco has been doing relatively well. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Disco.

Is There Enough Revenue Growth Forecasted For Disco?

In order to justify its P/S ratio, Disco would need to produce outstanding growth that's well in excess of the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 8.2% last year. The latest three year period has also seen an excellent 68% overall rise in revenue, aided somewhat by its short-term performance. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 19% per year during the coming three years according to the analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 17% per year, which is not materially different.

With this information, we find it interesting that Disco is trading at a high P/S compared to the industry. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for disappointment if the P/S falls to levels more in line with the growth outlook.

What Does Disco's P/S Mean For Investors?

Disco's P/S has grown nicely over the last month thanks to a handy boost in the share price. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Seeing as its revenues are forecast to grow in line with the wider industry, it would appear that Disco currently trades on a higher than expected P/S. The fact that the revenue figures aren't setting the world alight has us doubtful that the company's elevated P/S can be sustainable for the long term. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

It is also worth noting that we have found 1 warning sign for Disco that you need to take into consideration.

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.