Nextware Ltd.'s (TSE:4814) 30% Price Boost Is Out Of Tune With Revenues

Nextware Ltd. (TSE:4814) shares have continued their recent momentum with a 30% gain in the last month alone. Notwithstanding the latest gain, the annual share price return of 5.1% isn't as impressive.

Although its price has surged higher, there still wouldn't be many who think Nextware's price-to-sales (or "P/S") ratio of 0.8x is worth a mention when the median P/S in Japan's IT industry is similar at about 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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See our latest analysis for Nextware

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

The revenue growth achieved at Nextware over the last year would be more than acceptable for most companies. It might be that many expect the respectable revenue performance to wane, which has kept the P/S from rising. Those who are bullish on Nextware will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

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How Is Nextware's Revenue Growth Trending?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Nextware's to be considered reasonable.

Retrospectively, the last year delivered a decent 10% gain to the company's revenues. However, this wasn't enough as the latest three year period has seen an unpleasant 6.2% overall drop in revenue. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 7.3% shows it's an unpleasant look.

With this information, we find it concerning that Nextware is trading at a fairly similar P/S compared to the industry. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh on the share price eventually.

The Final Word

Nextware appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry 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.

The fact that Nextware currently trades at a P/S on par with the rest of the industry is surprising to us since its recent revenues have been in decline over the medium-term, all while the industry is set to grow. When we see revenue heading backwards in the context of growing industry forecasts, it'd make sense to expect a possible share price decline on the horizon, sending the moderate P/S lower. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Nextware (of which 2 are a bit unpleasant!) you should know about.

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