Environment Friendly Holdings Corp.'s (TSE:3777) 44% Jump Shows Its Popularity With Investors
Those holding Environment Friendly Holdings Corp. (TSE:3777) shares would be relieved that the share price has rebounded 44% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Looking back a bit further, it's encouraging to see the stock is up 84% in the last year.
After such a large jump in price, given around half the companies in Japan's Renewable Energy industry have price-to-sales ratios (or "P/S") below 0.6x, you may consider Environment Friendly Holdings as a stock to avoid entirely with its 2.8x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.
View our latest analysis for Environment Friendly Holdings
What Does Environment Friendly Holdings' Recent Performance Look Like?
For example, consider that Environment Friendly Holdings' financial performance has been poor lately as its revenue has been in decline. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. However, if this isn't the case, investors might get caught out paying too much for the stock.
We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Environment Friendly Holdings' earnings, revenue and cash flow.Is There Enough Revenue Growth Forecasted For Environment Friendly Holdings?
There's an inherent assumption that a company should far outperform the industry for P/S ratios like Environment Friendly Holdings' to be considered reasonable.
Retrospectively, the last year delivered a frustrating 63% decrease to the company's top line. The latest three year period has seen an incredible overall rise in revenue, a stark contrast to the last 12 months. Accordingly, shareholders will be pleased, but also have some serious questions to ponder about the last 12 months.
Comparing that recent medium-term revenue trajectory with the industry's one-year growth forecast of 0.2% shows it's noticeably more attractive.
With this information, we can see why Environment Friendly Holdings is trading at such a high P/S compared to the industry. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.
The Final Word
Environment Friendly Holdings' P/S has grown nicely over the last month thanks to a handy boost in the share price. 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.
It's no surprise that Environment Friendly Holdings can support its high P/S given the strong revenue growth its experienced over the last three-year is superior to the current industry outlook. In the eyes of shareholders, the probability of a continued growth trajectory is great enough to prevent the P/S from pulling back. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price.
We don't want to rain on the parade too much, but we did also find 1 warning sign for Environment Friendly Holdings that you need to be mindful of.
If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.
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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.