circlace Inc (TSE:5029) Soars 33% But It's A Story Of Risk Vs Reward

Those holding circlace Inc (TSE:5029) shares would be relieved that the share price has rebounded 33% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 21% over that time.

Although its price has surged higher, there still wouldn't be many who think circlace'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 1.1x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

View our latest analysis for circlace

How circlace Has Been Performing

Revenue has risen firmly for circlace recently, which is pleasing to see. One possibility is that the P/S is moderate because investors think this respectable revenue growth might not be enough to outperform the broader industry in the near future. If that doesn't eventuate, then existing shareholders probably aren't too pessimistic about the future direction of the share price.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on circlace's earnings, revenue and cash flow.

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

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

Taking a look back first, we see that the company managed to grow revenues by a handy 15% last year. This was backed up an excellent period prior to see revenue up by 60% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

When compared to the industry's one-year growth forecast of 5.5%, the most recent medium-term revenue trajectory is noticeably more alluring

In light of this, it's curious that circlace's P/S sits in line with the majority of other companies. It may be that most investors are not convinced the company can maintain its recent growth rates.

The Bottom Line On circlace's P/S

circlace's stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. 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.

We didn't quite envision circlace's P/S sitting in line with the wider industry, considering the revenue growth over the last three-year is higher than the current industry outlook. It'd be fair to assume that potential risks the company faces could be the contributing factor to the lower than expected P/S. It appears some are indeed anticipating revenue instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

There are also other vital risk factors to consider and we've discovered 2 warning signs for circlace (1 can't be ignored!) that you should be aware of before investing here.

If these risks are making you reconsider your opinion on circlace, 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.