Investor Optimism Abounds Japan Display Inc. (TSE:6740) But Growth Is Lacking

With a median price-to-sales (or "P/S") ratio of close to 0.7x in the Electronic industry in Japan, you could be forgiven for feeling indifferent about Japan Display Inc.'s (TSE:6740) P/S ratio of 0.6x. 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.

See our latest analysis for Japan Display

What Does Japan Display's Recent Performance Look Like?

Japan Display hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. It might be that many expect the dour revenue performance to strengthen positively, which has kept the P/S from falling. However, if this isn't the case, investors might get caught out paying too much for the stock.

Want the full picture on analyst estimates for the company? Then our free report on Japan Display will help you uncover what's on the horizon.

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

The only time you'd be comfortable seeing a P/S like Japan Display's is when the company's growth is tracking the industry closely.

Retrospectively, the last year delivered a frustrating 17% decrease to the company's top line. As a result, revenue from three years ago have also fallen 37% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Looking ahead now, revenue is anticipated to climb by 2.2% during the coming year according to the only analyst following the company. Meanwhile, the rest of the industry is forecast to expand by 6.7%, which is noticeably more attractive.

In light of this, it's curious that Japan Display's P/S sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

The Bottom Line On Japan Display's P/S

Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

When you consider that Japan Display's revenue growth estimates are fairly muted compared to the broader industry, it's easy to see why we consider it unexpected to be trading at its current P/S ratio. At present, we aren't confident in the P/S as the predicted future revenues aren't likely to support a more positive sentiment for long. A positive change is needed in order to justify the current price-to-sales ratio.

Plus, you should also learn about these 4 warning signs we've spotted with Japan Display (including 2 which can't be ignored).

If you're unsure about the strength of Japan Display's 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.