Fuva Brain Limited (TSE:3927) Might Not Be As Mispriced As It Looks After Plunging 25%

Fuva Brain Limited (TSE:3927) shareholders that were waiting for something to happen have been dealt a blow with a 25% share price drop in the last month. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 26% in that time.

In spite of the heavy fall in price, Fuva Brain's price-to-sales (or "P/S") ratio of 0.7x might still make it look like a buy right now compared to the Software industry in Japan, where around half of the companies have P/S ratios above 1.9x and even P/S above 4x are quite common. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

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View our latest analysis for Fuva Brain

How Fuva Brain Has Been Performing

With revenue growth that's exceedingly strong of late, Fuva Brain has been doing very well. Perhaps the market is expecting future revenue performance to dwindle, which has kept the P/S suppressed. Those who are bullish on Fuva Brain will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

Although there are no analyst estimates available for Fuva Brain, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

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

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

If we review the last year of revenue growth, the company posted a terrific increase of 37%. The latest three year period has also seen an excellent 137% overall rise in revenue, aided by its short-term performance. Therefore, it's fair to say the revenue growth recently has been superb for the company.

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

In light of this, it's peculiar that Fuva Brain's P/S sits below the majority of other companies. It looks like most investors are not convinced the company can maintain its recent growth rates.

The Key Takeaway

Fuva Brain's P/S has taken a dip along with its share price. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of Fuva Brain revealed its three-year revenue trends aren't boosting its P/S anywhere near as much as we would have predicted, given they look better than current industry expectations. When we see strong revenue with faster-than-industry growth, we assume there are some significant underlying risks to the company's ability to make money which is applying downwards pressure on the P/S ratio. While recent revenue trends over the past medium-term suggest that the risk of a price decline is low, investors appear to perceive a likelihood of revenue fluctuations in the future.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Fuva Brain that you need to be mindful of.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.