EF-ON Inc.'s (TSE:9514) Popularity With Investors Under Threat As Stock Sinks 27%

EF-ON Inc. (TSE:9514) shareholders that were waiting for something to happen have been dealt a blow with a 27% share price drop in the last month. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 49% share price drop.

Although its price has dipped substantially, you could still be forgiven for feeling indifferent about EF-ON's P/S ratio of 0.4x, since the median price-to-sales (or "P/S") ratio for the Renewable Energy industry in Japan is also close to 0.6x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

View our latest analysis for EF-ON

How EF-ON Has Been Performing

With its revenue growth in positive territory compared to the declining revenue of most other companies, EF-ON has been doing quite well of late. One possibility is that the P/S ratio is moderate because investors think the company's revenue will be less resilient moving forward. Those who are bullish on EF-ON will be hoping that this isn't the case, so that they can pick up the stock at a slightly lower valuation.

Keen to find out how analysts think EF-ON's future stacks up against the industry? In that case, our free report is a great place to start.

How Is EF-ON's Revenue Growth Trending?

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

If we review the last year of revenue growth, the company posted a worthy increase of 6.0%. The solid recent performance means it was also able to grow revenue by 30% in total over the last three years. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

Looking ahead now, revenue is anticipated to climb by 11% during the coming year according to the two analysts following the company. With the industry predicted to deliver 15% growth, the company is positioned for a weaker revenue result.

In light of this, it's curious that EF-ON's P/S sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

What We Can Learn From EF-ON's P/S?

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

Our look at the analysts forecasts of EF-ON's revenue prospects has shown that its inferior revenue outlook isn't negatively impacting its P/S as much as we would have predicted. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Before you take the next step, you should know about the 5 warning signs for EF-ON (1 doesn't sit too well with us!) that we have uncovered.

If you're unsure about the strength of EF-ON's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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

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