More Unpleasant Surprises Could Be In Store For Intertrade Co.,Ltd.'s (TSE:3747) Shares After Tumbling 26%

Intertrade Co.,Ltd. (TSE:3747) shareholders that were waiting for something to happen have been dealt a blow with a 26% share price drop in the last month. Still, a bad month hasn't completely ruined the past year with the stock gaining 60%, which is great even in a bull market.

Although its price has dipped substantially, you could still be forgiven for thinking IntertradeLtd is a stock not worth researching with a price-to-sales ratios (or "P/S") of 2.8x, considering almost half the companies in Japan's Software industry have P/S ratios below 2x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

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Check out our latest analysis for IntertradeLtd

How IntertradeLtd Has Been Performing

For example, consider that IntertradeLtd's financial performance has been pretty ordinary lately as revenue growth is non-existent. One possibility is that the P/S is high because investors think the benign revenue growth will improve to outperform the broader industry in the near future. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

Do Revenue Forecasts Match The High P/S Ratio?

In order to justify its P/S ratio, IntertradeLtd would need to produce impressive growth in excess of the industry.

Retrospectively, the last year delivered virtually the same number to the company's top line as the year before. The lack of growth did nothing to help the company's aggregate three-year performance, which is an unsavory 11% drop in revenue. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 13% shows it's an unpleasant look.

In light of this, it's alarming that IntertradeLtd's P/S sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

What We Can Learn From IntertradeLtd's P/S?

There's still some elevation in IntertradeLtd's P/S, even if the same can't be said for its share price recently. 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 examination of IntertradeLtd revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Before you take the next step, you should know about the 3 warning signs for IntertradeLtd (2 are a bit unpleasant!) that we have uncovered.

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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.