Japfa Ltd.'s (SGX:UD2) Share Price Boosted 27% But Its Business Prospects Need A Lift Too

Despite an already strong run, Japfa Ltd. (SGX:UD2) shares have been powering on, with a gain of 27% in the last thirty days. The last 30 days bring the annual gain to a very sharp 35%.

Even after such a large jump in price, considering around half the companies operating in Singapore's Food industry have price-to-sales ratios (or "P/S") above 0.7x, you may still consider Japfa as an solid investment opportunity with its 0.1x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

See our latest analysis for Japfa

How Japfa Has Been Performing

Japfa certainly has been doing a good job lately as its revenue growth has been positive while most other companies have been seeing their revenue go backwards. Perhaps the market is expecting future revenue performance to follow the rest of the industry downwards, which has kept the P/S suppressed. Those who are bullish on Japfa will be hoping that this isn't the case and the company continues to beat out the industry.

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

How Is Japfa's Revenue Growth Trending?

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

Taking a look back first, we see that the company managed to grow revenues by a handy 6.2% last year. The solid recent performance means it was also able to grow revenue by 13% 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.

Shifting to the future, estimates from the lone analyst covering the company suggest revenue growth is heading into negative territory, declining 0.007% over the next year. With the industry predicted to deliver 2.9% growth, that's a disappointing outcome.

With this in consideration, we find it intriguing that Japfa's P/S is closely matching its industry peers. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Key Takeaway

Japfa's stock price has surged recently, but its but its P/S still remains modest. 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.

It's clear to see that Japfa maintains its low P/S on the weakness of its forecast for sliding revenue, as expected. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. Unless there's material change, it's hard to envision a situation where the stock price will rise drastically.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Japfa (of which 1 shouldn't be ignored!) you should know about.

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.