What You Can Learn From ENECHANGE Ltd.'s (TSE:4169) P/SAfter Its 50% Share Price Crash

ENECHANGE Ltd. (TSE:4169) shareholders that were waiting for something to happen have been dealt a blow with a 50% share price drop in the last month. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 59% loss during that time.

Although its price has dipped substantially, when almost half of the companies in Japan's IT industry have price-to-sales ratios (or "P/S") below 1.2x, you may still consider ENECHANGE as a stock probably not worth researching with its 2.4x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

View our latest analysis for ENECHANGE

What Does ENECHANGE's P/S Mean For Shareholders?

Recent times have been advantageous for ENECHANGE as its revenues have been rising faster than most other companies. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. 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 ENECHANGE.

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

In order to justify its P/S ratio, ENECHANGE would need to produce impressive growth in excess of the industry.

Taking a look back first, we see that the company grew revenue by an impressive 77% last year. Pleasingly, revenue has also lifted 287% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 40% each year during the coming three years according to the dual analysts following the company. With the industry only predicted to deliver 5.7% each year, the company is positioned for a stronger revenue result.

In light of this, it's understandable that ENECHANGE's P/S sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

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

ENECHANGE's P/S remain high even after its stock plunged. 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.

We've established that ENECHANGE maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the IT industry, as expected. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

There are also other vital risk factors to consider and we've discovered 2 warning signs for ENECHANGE (1 is a bit unpleasant!) that you should be aware of before investing here.

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.