Ecomott Inc.'s (TSE:3987) P/S Is Still On The Mark Following 30% Share Price Bounce

Ecomott Inc. (TSE:3987) shareholders would be excited to see that the share price has had a great month, posting a 30% gain and recovering from prior weakness. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 11% over that time.

Although its price has surged higher, it's still not a stretch to say that Ecomott's price-to-sales (or "P/S") ratio of 0.8x right now seems quite "middle-of-the-road" compared to the IT industry in Japan, where the median P/S ratio is around 1x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

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Check out our latest analysis for Ecomott

How Ecomott Has Been Performing

As an illustration, revenue has deteriorated at Ecomott over the last year, which is not ideal at all. It might be that many expect the company to put the disappointing revenue performance behind them over the coming period, which has kept the P/S from falling. 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 Ecomott will help you shine a light on its historical performance.

How Is Ecomott's Revenue Growth Trending?

In order to justify its P/S ratio, Ecomott would need to produce growth that's similar to the industry.

Retrospectively, the last year delivered a frustrating 7.0% decrease to the company's top line. 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 18% in total. So we can start by confirming that the company has generally done a good job of growing revenue over that time, even though it had some hiccups along the way.

It's interesting to note that the rest of the industry is similarly expected to grow by 7.4% over the next year, which is fairly even with the company's recent medium-term annualised growth rates.

With this information, we can see why Ecomott is trading at a fairly similar P/S to the industry. Apparently shareholders are comfortable to simply hold on assuming the company will continue keeping a low profile.

What Does Ecomott's P/S Mean For Investors?

Ecomott's stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. 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.

As we've seen, Ecomott's three-year revenue trends seem to be contributing to its P/S, given they look similar to current industry expectations. With previous revenue trends that keep up with the current industry outlook, it's hard to justify the company's P/S ratio deviating much from it's current point. Unless the recent medium-term conditions change, they will continue to support the share price at these levels.

You need to take note of risks, for example - Ecomott has 3 warning signs (and 2 which are significant) we think you should know about.

If you're unsure about the strength of Ecomott'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.