With Rakus Co., Ltd. (TSE:3923) It Looks Like You'll Get What You Pay For

When you see that almost half of the companies in the Software industry in Japan have price-to-sales ratios (or "P/S") below 2.2x, Rakus Co., Ltd. (TSE:3923) looks to be giving off strong sell signals with its 9.7x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

Check out our latest analysis for Rakus

How Has Rakus Performed Recently?

With revenue growth that's superior to most other companies of late, Rakus has been doing relatively well. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

Is There Enough Revenue Growth Forecasted For Rakus?

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

Retrospectively, the last year delivered an exceptional 38% gain to the company's top line. The strong recent performance means it was also able to grow revenue by 149% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Shifting to the future, estimates from the eight analysts covering the company suggest revenue should grow by 26% each year over the next three years. With the industry only predicted to deliver 14% per year, the company is positioned for a stronger revenue result.

With this information, we can see why Rakus is trading at such a high P/S compared to the industry. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What We Can Learn From Rakus' P/S?

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.

As we suspected, our examination of Rakus' analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

You should always think about risks. Case in point, we've spotted 1 warning sign for Rakus you should be aware of.

If you're unsure about the strength of Rakus' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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.