There's Reason For Concern Over Taiyo Yuden Co., Ltd.'s (TSE:6976) Massive 25% Price Jump

Taiyo Yuden Co., Ltd. (TSE:6976) shares have continued their recent momentum with a 25% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 56% in the last year.

Since its price has surged higher, given close to half the companies operating in Japan's Electronic industry have price-to-sales ratios (or "P/S") below 0.7x, you may consider Taiyo Yuden as a stock to potentially avoid with its 1.6x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

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View our latest analysis for Taiyo Yuden

What Does Taiyo Yuden's Recent Performance Look Like?

Taiyo Yuden's revenue growth of late has been pretty similar to most other companies. It might be that many expect the mediocre revenue performance to strengthen positively, which has kept the P/S ratio from falling. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

How Is Taiyo Yuden's Revenue Growth Trending?

Taiyo Yuden's P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 4.2% last year. Still, revenue has barely risen at all in aggregate from three years ago, which is not ideal. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Turning to the outlook, the next three years should generate growth of 5.6% each year as estimated by the analysts watching the company. With the industry predicted to deliver 7.0% growth per year, the company is positioned for a comparable revenue result.

In light of this, it's curious that Taiyo Yuden's P/S sits above the majority of other companies. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for disappointment if the P/S falls to levels more in line with the growth outlook.

The Final Word

Taiyo Yuden shares have taken a big step in a northerly direction, but its P/S is elevated as a result. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Given Taiyo Yuden's future revenue forecasts are in line with the wider industry, the fact that it trades at an elevated P/S is somewhat surprising. The fact that the revenue figures aren't setting the world alight has us doubtful that the company's elevated P/S can be sustainable for the long term. Unless the company can jump ahead of the rest of the industry in the short-term, it'll be a challenge to maintain the share price at current levels.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Taiyo Yuden (of which 1 is a bit concerning!) you should know about.

If you're unsure about the strength of Taiyo Yuden'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.