What You Can Learn From Money Forward, Inc.'s (TSE:3994) P/S After Its 25% Share Price Crash

Money Forward, Inc. (TSE:3994) shares have had a horrible month, losing 25% after a relatively good period beforehand. Indeed, the recent drop has reduced its annual gain to a relatively sedate 5.3% over the last twelve months.

Although its price has dipped substantially, given around half the companies in Japan's Software industry have price-to-sales ratios (or "P/S") below 2x, you may still consider Money Forward as a stock to avoid entirely with its 6.7x 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.

View our latest analysis for Money Forward

How Has Money Forward Performed Recently?

With revenue growth that's superior to most other companies of late, Money Forward 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 Money Forward.

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

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

Taking a look back first, we see that the company grew revenue by an impressive 39% last year. The latest three year period has also seen an excellent 163% 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.

Looking ahead now, revenue is anticipated to climb by 26% per annum during the coming three years according to the nine analysts following the company. Meanwhile, the rest of the industry is forecast to only expand by 13% per annum, which is noticeably less attractive.

In light of this, it's understandable that Money Forward's P/S sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What Does Money Forward's P/S Mean For Investors?

Money Forward's shares may have suffered, but its P/S remains high. 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 look into Money Forward shows that its P/S ratio remains high on the merit of its strong future revenues. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless these conditions change, they will continue to provide strong support to the share price.

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