Daiwabo Holdings Co., Ltd.'s (TSE:3107) Share Price Is Matching Sentiment Around Its Revenues

When you see that almost half of the companies in the Electronic industry in Japan have price-to-sales ratios (or "P/S") above 0.7x, Daiwabo Holdings Co., Ltd. (TSE:3107) looks to be giving off some buy signals with its 0.2x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

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See our latest analysis for Daiwabo Holdings

What Does Daiwabo Holdings' Recent Performance Look Like?

With revenue growth that's superior to most other companies of late, Daiwabo Holdings has been doing relatively well. Perhaps the market is expecting future revenue performance to dive, which has kept the P/S suppressed. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

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Do Revenue Forecasts Match The Low P/S Ratio?

In order to justify its P/S ratio, Daiwabo Holdings would need to produce sluggish growth that's trailing the industry.

Taking a look back first, we see that the company grew revenue by an impressive 23% last year. Pleasingly, revenue has also lifted 55% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Turning to the outlook, the next year should bring diminished returns, with revenue decreasing 5.7% as estimated by the dual analysts watching the company. That's not great when the rest of the industry is expected to grow by 6.1%.

With this information, we are not surprised that Daiwabo Holdings is trading at a P/S lower than the industry. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

The Key Takeaway

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.

With revenue forecasts that are inferior to the rest of the industry, it's no surprise that Daiwabo Holdings' P/S is on the lower end of the spectrum. As other companies in the industry are forecasting revenue growth, Daiwabo Holdings' poor outlook justifies its low P/S ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

You need to take note of risks, for example - Daiwabo Holdings has 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

If you're unsure about the strength of Daiwabo Holdings' 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.