NCXX Group Inc. (TSE:6634) Stock Rockets 34% As Investors Are Less Pessimistic Than Expected

NCXX Group Inc. (TSE:6634) shares have continued their recent momentum with a 34% gain in the last month alone. Unfortunately, despite the strong performance over the last month, the full year gain of 3.8% isn't as attractive.

Following the firm bounce in price, when almost half of the companies in Japan's Communications industry have price-to-sales ratios (or "P/S") below 0.7x, you may consider NCXX Group as a stock probably not worth researching with its 2.5x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

Check out our latest analysis for NCXX Group

How NCXX Group Has Been Performing

With revenue growth that's exceedingly strong of late, NCXX Group has been doing very well. The P/S ratio is probably high because investors think this strong revenue growth will be enough to outperform the broader industry in the near future. However, if this isn't the case, investors might get caught out paying too much for the stock.

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 NCXX Group's earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For NCXX Group?

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

Retrospectively, the last year delivered an exceptional 166% gain to the company's top line. Still, revenue has fallen 56% in total from three years ago, which is quite disappointing. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 32% shows it's an unpleasant look.

With this in mind, we find it worrying that NCXX Group's P/S exceeds that of its industry peers. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

The Key Takeaway

NCXX Group's P/S is on the rise since its shares have risen strongly. 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.

We've established that NCXX Group currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

Plus, you should also learn about these 3 warning signs we've spotted with NCXX Group (including 2 which are significant).

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.