Japan Display Inc.'s (TSE:6740) 29% Share Price Surge Not Quite Adding Up

Japan Display Inc. (TSE:6740) shareholders would be excited to see that the share price has had a great month, posting a 29% gain and recovering from prior weakness. Notwithstanding the latest gain, the annual share price return of 10.0% isn't as impressive.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about Japan Display's P/S ratio of 0.8x, since the median price-to-sales (or "P/S") ratio for the Electronic industry in Japan is also close to 0.7x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

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See our latest analysis for Japan Display

What Does Japan Display's P/S Mean For Shareholders?

For example, consider that Japan Display's financial performance has been poor lately as its revenue has been in decline. Perhaps investors believe the recent revenue performance is enough to keep in line with the industry, which is keeping the P/S from dropping off. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

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 Japan Display's earnings, revenue and cash flow.

How Is Japan Display's Revenue Growth Trending?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Japan Display's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 32% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 43% in aggregate. 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 6.2% shows it's an unpleasant look.

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

The Final Word

Japan Display appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

The fact that Japan Display currently trades at a P/S on par with the rest of the industry is surprising to us since its recent revenues have been in decline over the medium-term, all while the industry is set to grow. When we see revenue heading backwards in the context of growing industry forecasts, it'd make sense to expect a possible share price decline on the horizon, sending the moderate P/S lower. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

Don't forget that there may be other risks. For instance, we've identified 4 warning signs for Japan Display that you should be aware of.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.