Optimistic Investors Push Fujita Kanko Inc. (TSE:9722) Shares Up 41% But Growth Is Lacking (2024)

Fujita Kanko Inc. (TSE:9722) shareholders would be excited to see that the share price has had a great month, posting a 41% gain and recovering from prior weakness. The annual gain comes to 159% following the latest surge, making investors sit up and take notice.

After such a large jump in price, when almost half of the companies in Japan's Hospitality industry have price-to-sales ratios (or "P/S") below 1x, you may consider Fujita Kanko as a stock probably not worth researching with its 1.6x 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 as high as it is.

View our latest analysis for Fujita Kanko

How Fujita Kanko Has Been Performing

With revenue growth that's superior to most other companies of late, Fujita Kanko has been doing relatively well. The P/S is probably high because investors think this strong revenue performance will continue. However, if this isn't the case, investors might get caught out paying too much for the stock.

Want the full picture on analyst estimates for the company? Then our free report on Fujita Kanko will help you uncover what's on the horizon.

Is There Enough Revenue Growth Forecasted For Fujita Kanko?

Fujita Kanko's P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

Taking a look back first, we see that the company grew revenue by an impressive 40% last year. Pleasingly, revenue has also lifted 223% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Looking ahead now, revenue is anticipated to climb by 8.3% during the coming year according to the one analyst following the company. With the industry predicted to deliver 12% growth, the company is positioned for a weaker revenue result.

With this information, we find it concerning that Fujita Kanko is trading at a P/S higher than the industry. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Final Word

Fujita Kanko's P/S is on the rise since its shares have risen strongly. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've concluded that Fujita Kanko currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. The weakness in the company's revenue estimate doesn't bode well for the elevated P/S, which could take a fall if the revenue sentiment doesn't improve. At these price levels, investors should remain cautious, particularly if things don't improve.

Before you settle on your opinion, we've discovered 3 warning signs for Fujita Kanko (2 are a bit unpleasant!) 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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