Why We're Not Concerned Yet About THE WHY HOW DO COMPANY, Inc.'s (TSE:3823) 29% Share Price Plunge

Explore WHY HOW DO COMPANY's Fair Values from the Community and select yours

THE WHY HOW DO COMPANY, Inc. (TSE:3823) shareholders that were waiting for something to happen have been dealt a blow with a 29% share price drop in the last month. The good news is that in the last year, the stock has shone bright like a diamond, gaining 181%.

Even after such a large drop in price, given around half the companies in Japan's Software industry have price-to-sales ratios (or "P/S") below 2.2x, you may still consider WHY HOW DO COMPANY as a stock to avoid entirely with its 5.3x 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.

This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality.

See our latest analysis for WHY HOW DO COMPANY

What Does WHY HOW DO COMPANY's Recent Performance Look Like?

With revenue growth that's exceedingly strong of late, WHY HOW DO COMPANY has been doing very well. The P/S ratio is probably high because investors think this strong revenue growth will be enough 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 WHY HOW DO COMPANY will help you shine a light on its historical performance.

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

WHY HOW DO COMPANY's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

Retrospectively, the last year delivered an exceptional 100% gain to the company's top line. The strong recent performance means it was also able to grow revenue by 60% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenue over that time.

Comparing that to the industry, which is only predicted to deliver 13% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised revenue results.

With this in consideration, it's not hard to understand why WHY HOW DO COMPANY's P/S is high relative to its industry peers. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the wider industry.

The Bottom Line On WHY HOW DO COMPANY's P/S

Even after such a strong price drop, WHY HOW DO COMPANY's P/S still exceeds the industry median significantly. 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.

As we suspected, our examination of WHY HOW DO COMPANY revealed its three-year revenue trends are contributing to its high P/S, given they look better than current industry expectations. At this stage investors feel the potential continued revenue growth in the future is great enough to warrant an inflated P/S. Barring any significant changes to the company's ability to make money, the share price should continue to be propped up.

You should always think about risks. Case in point, we've spotted 3 warning signs for WHY HOW DO COMPANY you should be aware of, and 2 of them shouldn't be ignored.

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).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.