freee K.K.'s (TSE:4478) Stock Retreats 26% But Revenues Haven't Escaped The Attention Of Investors

freee K.K. (TSE:4478) shares have had a horrible month, losing 26% after a relatively good period beforehand. Looking back over the past twelve months the stock has been a solid performer regardless, with a gain of 12%.

In spite of the heavy fall in price, when almost half of the companies in Japan's Software industry have price-to-sales ratios (or "P/S") below 2.3x, you may still consider freee K.K as a stock not worth researching with its 5.6x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

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See our latest analysis for freee K.K

How Has freee K.K Performed Recently?

freee K.K certainly has been doing a good job lately as it's been growing revenue more than most other companies. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. If not, then existing shareholders might be a little nervous about the viability of the share price.

Keen to find out how analysts think freee K.K's future stacks up against the industry? In that case, our free report is a great place to start.

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

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

Taking a look back first, we see that the company grew revenue by an impressive 31% last year. The strong recent performance means it was also able to grow revenue by 131% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenue over that time.

Shifting to the future, estimates from the ten analysts covering the company suggest revenue should grow by 21% per year over the next three years. That's shaping up to be materially higher than the 12% each 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 Key Takeaway

freee K.K's shares may have suffered, but its P/S remains high. 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. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

Having said that, be aware freee K.K is showing 1 warning sign in our investment analysis, you should know about.

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.