Environment Friendly Holdings Corp.'s (TSE:3777) 27% Jump Shows Its Popularity With Investors

Explore Environment Friendly Holdings's Fair Values from the Community and select yours

Environment Friendly Holdings Corp. (TSE:3777) shares have continued their recent momentum with a 27% gain in the last month alone. The last month tops off a massive increase of 126% in the last year.

After such a large jump in price, given close to half the companies operating in Japan's Renewable Energy industry have price-to-sales ratios (or "P/S") below 0.8x, you may consider Environment Friendly Holdings as a stock to potentially avoid with its 2.5x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

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Check out our latest analysis for Environment Friendly Holdings

What Does Environment Friendly Holdings' Recent Performance Look Like?

As an illustration, revenue has deteriorated at Environment Friendly Holdings over the last year, which is not ideal at all. It might be that many expect the company to still outplay most other companies 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.

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

How Is Environment Friendly Holdings' Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as high as Environment Friendly Holdings' is when the company's growth is on track to outshine the industry.

Retrospectively, the last year delivered a frustrating 59% decrease to the company's top line. Spectacularly, three year revenue growth has ballooned by several orders of magnitude, despite the drawbacks experienced in the last 12 months. So while the company has done a great job in the past, it's somewhat concerning to see revenue growth decline so harshly.

In contrast to the company, the rest of the industry is expected to decline by 2.6% over the next year, which puts the company's recent medium-term positive growth rates in a good light for now.

In light of this, it's understandable that Environment Friendly Holdings' P/S sits above the majority of other companies. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the industry. Nonetheless, with most other businesses facing an uphill battle, staying on its current revenue path is no certainty.

The Final Word

Environment Friendly Holdings 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.

We see that Environment Friendly Holdings justifiably maintains its high P/S on the merits of its recentthree-year revenue growth beating forecasts amidst struggling industry. Right now shareholders are comfortable with the P/S as they are quite confident revenues aren't under threat. However, it'd be fair to raise concerns over whether this level of revenue performance will continue given the harsh conditions facing the industry. Otherwise, it's hard to see the share price falling strongly in the near future if its revenue performance persists.

It is also worth noting that we have found 1 warning sign for Environment Friendly Holdings that you need to take into consideration.

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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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.