Slammed 25% MEDIROM Healthcare Technologies Inc. (NASDAQ:MRM) Screens Well Here But There Might Be A Catch

Unfortunately for some shareholders, the MEDIROM Healthcare Technologies Inc. (NASDAQ:MRM) share price has dived 25% in the last thirty days, prolonging recent pain. For any long-term shareholders, the last month ends a year to forget by locking in a 88% share price decline.

Following the heavy fall in price, given about half the companies operating in the United States' Consumer Services industry have price-to-sales ratios (or "P/S") above 1.6x, you may consider MEDIROM Healthcare Technologies as an attractive investment with its 0.1x P/S ratio. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for MEDIROM Healthcare Technologies

How MEDIROM Healthcare Technologies Has Been Performing

MEDIROM Healthcare Technologies could be doing better as it's been growing revenue less than most other companies lately. It seems that many are expecting the uninspiring revenue performance to persist, which has repressed the growth of the P/S ratio. If you still like the company, you'd be hoping revenue doesn't get any worse and that you could pick up some stock while it's out of favour.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on MEDIROM Healthcare Technologies.

Do Revenue Forecasts Match The Low P/S Ratio?

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

Taking a look back first, we see that the company managed to grow revenues by a handy 2.8% last year. Pleasingly, revenue has also lifted 74% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Shifting to the future, estimates from the only analyst covering the company suggest revenue should grow by 22% over the next year. Meanwhile, the rest of the industry is forecast to only expand by 12%, which is noticeably less attractive.

With this in consideration, we find it intriguing that MEDIROM Healthcare Technologies' P/S sits behind most of its industry peers. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

The Final Word

MEDIROM Healthcare Technologies' recently weak share price has pulled its P/S back below other Consumer Services companies. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

A look at MEDIROM Healthcare Technologies' revenues reveals that, despite glowing future growth forecasts, its P/S is much lower than we'd expect. When we see strong growth forecasts like this, we can only assume potential risks are what might be placing significant pressure on the P/S ratio. While the possibility of the share price plunging seems unlikely due to the high growth forecasted for the company, the market does appear to have some hesitation.

Don't forget that there may be other risks. For instance, we've identified 4 warning signs for MEDIROM Healthcare Technologies that you should be aware of.

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.