What You Can Learn From ELEMENTS, Inc.'s (TSE:5246) P/S After Its 26% Share Price Crash

Unfortunately for some shareholders, the ELEMENTS, Inc. (TSE:5246) share price has dived 26% in the last thirty days, prolonging recent pain. Longer-term, the stock has been solid despite a difficult 30 days, gaining 11% in the last year.

Even after such a large drop in price, given around half the companies in Japan's Software industry have price-to-sales ratios (or "P/S") below 2x, you may still consider ELEMENTS as a stock to avoid entirely with its 5x 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.

View our latest analysis for ELEMENTS

How ELEMENTS Has Been Performing

Recent times have been quite advantageous for ELEMENTS as its revenue has been rising very briskly. Perhaps the market is expecting future revenue performance to outperform the wider market, which has seemingly got people interested in the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on ELEMENTS will help you shine a light on its historical performance.

How Is ELEMENTS' Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as steep as ELEMENTS' is when the company's growth is on track to outshine the industry decidedly.

Retrospectively, the last year delivered an exceptional 45% gain to the company's top line. The strong recent performance means it was also able to grow revenue by 82% 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.

This is in contrast to the rest of the industry, which is expected to grow by 12% over the next year, materially lower than the company's recent medium-term annualised growth rates.

In light of this, it's understandable that ELEMENTS' P/S sits above the majority of other companies. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the wider industry.

What Does ELEMENTS' P/S Mean For Investors?

Even after such a strong price drop, ELEMENTS' P/S still exceeds the industry median significantly. 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've established that ELEMENTS maintains its high P/S on the strength of its recent three-year growth being higher than the wider industry forecast, as expected. At this stage investors feel the potential continued revenue growth in the future is great enough to warrant an inflated P/S. Unless the recent medium-term 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 3 warning signs for ELEMENTS (1 doesn't sit too well with us!) that you should be aware of before investing here.

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