Optimistic Investors Push Okamoto Glass Co., Ltd. (TSE:7746) Shares Up 38% But Growth Is Lacking

Okamoto Glass Co., Ltd. (TSE:7746) shares have continued their recent momentum with a 38% gain in the last month alone. The last month tops off a massive increase of 184% in the last year.

Following the firm bounce in price, when almost half of the companies in Japan's Electronic industry have price-to-sales ratios (or "P/S") below 0.7x, you may consider Okamoto Glass as a stock probably not worth researching with its 1.8x 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.

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Check out our latest analysis for Okamoto Glass

What Does Okamoto Glass' Recent Performance Look Like?

It looks like revenue growth has deserted Okamoto Glass recently, which is not something to boast about. It might be that many are expecting an improvement to the uninspiring revenue performance over the coming period, which has kept the P/S from collapsing. 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 Okamoto Glass' earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For Okamoto Glass?

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

Taking a look back first, we see that there was hardly any revenue growth to speak of for the company over the past year. The lack of growth did nothing to help the company's aggregate three-year performance, which is an unsavory 9.6% drop in revenue. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Comparing that to the industry, which is predicted to deliver 5.2% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

In light of this, it's alarming that Okamoto Glass' P/S sits above the majority of other companies. 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. 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.

The Key Takeaway

The large bounce in Okamoto Glass' shares has lifted the company's P/S handsomely. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Okamoto Glass 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. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. Should recent medium-term revenue trends persist, it would pose a significant risk to existing shareholders' investments and prospective investors will have a hard time accepting the current value of the stock.

Before you take the next step, you should know about the 2 warning signs for Okamoto Glass (1 is concerning!) that we have uncovered.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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