Optimistic Investors Push Sumitomo Pharma Co., Ltd. (TSE:4506) Shares Up 26% But Growth Is Lacking

Despite an already strong run, Sumitomo Pharma Co., Ltd. (TSE:4506) shares have been powering on, with a gain of 26% in the last thirty days. The last 30 days were the cherry on top of the stock’s 438% gain in the last year, which is nothing short of spectacular.

Since its price has surged higher, you could be forgiven for thinking Sumitomo Pharma is a stock not worth researching with a price-to-sales ratios (or “P/S”) of 2.6x, considering almost half the companies in Japan’s Pharmaceuticals industry have P/S ratios below 2.1x. Nonetheless, we’d need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

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See our latest analysis for Sumitomo Pharma

How Sumitomo Pharma Has Been Performing

With revenue growth that’s superior to most other companies of late, Sumitomo Pharma has been doing relatively well. The P/S is probably high because investors think this strong revenue performance will continue. You’d really hope so, otherwise you’re paying a pretty hefty price for no particular reason.

Want the full picture on analyst estimates for the company? Then our free report on Sumitomo Pharma will help you uncover what’s on the horizon.

How Is Sumitomo Pharma’s Revenue Growth Trending?

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

If we review the last year of revenue growth, the company posted a terrific increase of 30%. Still, revenue has fallen 24% in total from three years ago, which is quite disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenues over that time.

Turning to the outlook, the next three years should generate growth of 6.6% each year as estimated by the six analysts watching the company. With the industry predicted to deliver 5.7% growth per annum, the company is positioned for a comparable revenue result.

With this in consideration, we find it intriguing that Sumitomo Pharma’s P/S is higher than its industry peers. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as this level of revenue growth is likely to weigh down the share price eventually.

What We Can Learn From Sumitomo Pharma’s P/S?

Sumitomo Pharma shares have taken a big step in a northerly direction, but its P/S is elevated as a result. 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.

Analysts are forecasting Sumitomo Pharma’s revenues to only grow on par with the rest of the industry, which has lead to the high P/S ratio being unexpected. The fact that the revenue figures aren’t setting the world alight has us doubtful that the company’s elevated P/S can be sustainable for the long term. This places shareholders’ investments at risk and potential investors in danger of paying an unnecessary premium.

Having said that, be aware Sumitomo Pharma is showing 4 warning signs in our investment analysis, you should know about.

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.