Forside Co.,Ltd.'s (TSE:2330) Shares Climb 27% But Its Business Is Yet to Catch Up

Despite an already strong run, Forside Co.,Ltd. (TSE:2330) shares have been powering on, with a gain of 27% in the last thirty days. Unfortunately, despite the strong performance over the last month, the full year gain of 9.8% isn't as attractive.

In spite of the firm bounce in price, there still wouldn't be many who think ForsideLtd's price-to-sales (or "P/S") ratio of 1.9x is worth a mention when the median P/S in Japan's Software industry is similar at about 2x. 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.

Check out our latest analysis for ForsideLtd

What Does ForsideLtd's Recent Performance Look Like?

We'd have to say that with no tangible growth over the last year, ForsideLtd's revenue has been unimpressive. Perhaps the market believes the recent run-of-the-mill revenue performance isn't enough to outperform the industry, which has kept the P/S muted. 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 not quite in favour.

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

How Is ForsideLtd's Revenue Growth Trending?

There's an inherent assumption that a company should be matching the industry for P/S ratios like ForsideLtd's to be considered reasonable.

Retrospectively, the last year delivered virtually the same number to the company's top line as the year before. The longer-term trend has been no better as the company has no revenue growth to show for over the last three years either. So it seems apparent to us that the company has struggled to grow revenue meaningfully over that time.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 12% shows it's noticeably less attractive.

In light of this, it's curious that ForsideLtd's P/S sits in line with the majority of other companies. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as a continuation of recent revenue trends is likely to weigh down the shares eventually.

The Key Takeaway

ForsideLtd's stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. 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 examination of ForsideLtd revealed its poor three-year revenue trends aren't resulting in a lower P/S as per our expectations, given they look worse than current industry outlook. Right now we are uncomfortable with the P/S as this revenue performance isn't likely to support a more positive sentiment for long. Unless the recent medium-term conditions improve, it's hard to accept the current share price as fair value.

Having said that, be aware ForsideLtd is showing 3 warning signs in our investment analysis, and 1 of those is a bit concerning.

If you're unsure about the strength of ForsideLtd'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.