NCXX Group Inc.'s (TSE:6634) Popularity With Investors Under Threat As Stock Sinks 26%

NCXX Group Inc. (TSE:6634) shares have retraced a considerable 26% in the last month, reversing a fair amount of their solid recent performance. Longer-term, the stock has been solid despite a difficult 30 days, gaining 13% in the last year.

Even after such a large drop in price, given close to half the companies operating in Japan's Communications industry have price-to-sales ratios (or "P/S") below 0.8x, you may still consider NCXX Group as a stock to potentially avoid with its 2.2x 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.

This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality.

Check out our latest analysis for NCXX Group

What Does NCXX Group's P/S Mean For Shareholders?

Recent times have been quite advantageous for NCXX Group 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. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

How Is NCXX Group's Revenue Growth Trending?

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

Taking a look back first, we see that the company grew revenue by an impressive 221% last year. However, this wasn't enough as the latest three year period has seen the company endure a nasty 54% drop in revenue in aggregate. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

In contrast to the company, the rest of the industry is expected to grow by 31% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this in mind, we find it worrying that NCXX Group's P/S exceeds that of its industry peers. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

What Does NCXX Group's P/S Mean For Investors?

There's still some elevation in NCXX Group's P/S, even if the same can't be said for its share price recently. 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.

Our examination of NCXX Group revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with NCXX Group (at least 2 which are concerning), and understanding these should be part of your investment process.

If you're unsure about the strength of NCXX Group's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.