Some Forside Co.,Ltd. (TSE:2330) Shareholders Look For Exit As Shares Take 32% Pounding

The Forside Co.,Ltd. (TSE:2330) share price has softened a substantial 32% over the previous 30 days, handing back much of the gains the stock has made lately. Regardless, last month's decline is barely a blip on the stock's price chart as it has gained a monstrous 319% in the last year.

In spite of the heavy fall in price, there still wouldn't be many who think ForsideLtd's price-to-sales (or "P/S") ratio of 2.2x is worth a mention when it essentially matches the median P/S in Japan's Software industry. 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.

Check out our latest analysis for ForsideLtd

How Has ForsideLtd Performed Recently?

For example, consider that ForsideLtd's financial performance has been poor lately as its revenue has been in decline. Perhaps investors believe the recent revenue performance is enough to keep in line with the industry, which is keeping the P/S from dropping off. 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 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.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 3.4%. That put a dampener on the good run it was having over the longer-term as its three-year revenue growth is still a noteworthy 19% in total. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been mostly respectable for the company.

This is in contrast to the rest of the industry, which is expected to grow by 14% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it interesting that ForsideLtd is trading at a fairly similar P/S compared to the industry. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as a continuation of recent revenue trends is likely to weigh down the shares eventually.

The Final Word

With its share price dropping off a cliff, the P/S for ForsideLtd looks to be in line with the rest of the Software industry. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

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. When we see weak revenue with slower than industry growth, we suspect the share price is at risk of declining, bringing the P/S back in line with expectations. Unless the recent medium-term conditions improve, it's hard to accept the current share price as fair value.

Plus, you should also learn about these 4 warning signs we've spotted with ForsideLtd (including 1 which is potentially serious).

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.