After Leaping 33% freee K.K. (TSE:4478) Shares Are Not Flying Under The Radar

freee K.K. (TSE:4478) shares have had a really impressive month, gaining 33% after a shaky period beforehand. Taking a wider view, although not as strong as the last month, the full year gain of 13% is also fairly reasonable.

After such a large jump in price, given around half the companies in Japan's Software industry have price-to-sales ratios (or "P/S") below 2.3x, you may consider freee K.K as a stock to avoid entirely with its 9.8x 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.

Check out our latest analysis for freee K.K

How freee K.K Has Been Performing

Recent times have been advantageous for freee K.K as its revenues have been rising faster than most other companies. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Want the full picture on analyst estimates for the company? Then our free report on freee K.K will help you uncover what's on the horizon.

Is There Enough Revenue Growth Forecasted For freee K.K?

freee K.K's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

Retrospectively, the last year delivered an exceptional 37% gain to the company's top line. The strong recent performance means it was also able to grow revenue by 164% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 24% per annum during the coming three years according to the nine analysts following the company. That's shaping up to be materially higher than the 14% per year growth forecast for the broader industry.

With this information, we can see why freee K.K 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.

The Final Word

freee K.K's P/S has grown nicely over the last month thanks to a handy boost in the 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.

As we suspected, our examination of freee K.K's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

Before you settle on your opinion, we've discovered 1 warning sign for freee K.K that you should be aware of.

If these risks are making you reconsider your opinion on freee K.K, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.