Take Care Before Jumping Onto SDS HOLDINGS Co.,Ltd. (TSE:1711) Even Though It's 33% Cheaper

To the annoyance of some shareholders, SDS HOLDINGS Co.,Ltd. (TSE:1711) shares are down a considerable 33% in the last month, which continues a horrid run for the company. The recent drop has obliterated the annual return, with the share price now down 5.3% over that longer period.

Even after such a large drop in price, there still wouldn't be many who think SDS HOLDINGSLtd's price-to-sales (or "P/S") ratio of 0.6x is worth a mention when it essentially matches the median P/S in Japan's Renewable Energy industry. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

Check out our latest analysis for SDS HOLDINGSLtd

How Has SDS HOLDINGSLtd Performed Recently?

The revenue growth achieved at SDS HOLDINGSLtd over the last year would be more than acceptable for most companies. Perhaps the market is expecting future revenue performance to only keep up with the broader industry, which has keeping the P/S in line with expectations. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

Although there are no analyst estimates available for SDS HOLDINGSLtd, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Do Revenue Forecasts Match The P/S Ratio?

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

Retrospectively, the last year delivered an exceptional 22% gain to the company's top line. The latest three year period has also seen an incredible overall rise in revenue, aided by its incredible short-term performance. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Comparing that to the industry, which is only predicted to deliver 15% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised revenue results.

With this information, we find it interesting that SDS HOLDINGSLtd is trading at a fairly similar P/S compared to the industry. Apparently some shareholders believe the recent performance is at its limits and have been accepting lower selling prices.

What Does SDS HOLDINGSLtd's P/S Mean For Investors?

With its share price dropping off a cliff, the P/S for SDS HOLDINGSLtd looks to be in line with the rest of the Renewable Energy industry. 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.

To our surprise, SDS HOLDINGSLtd revealed its three-year revenue trends aren't contributing to its P/S as much as we would have predicted, given they look better than current industry expectations. When we see strong revenue with faster-than-industry growth, we can only assume potential risks are what might be placing pressure on the P/S ratio. At least the risk of a price drop looks to be subdued if recent medium-term revenue trends continue, but investors seem to think future revenue could see some volatility.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for SDS HOLDINGSLtd (1 is a bit concerning) you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.

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