When you see that almost half of the companies in the Food industry in Singapore have price-to-sales ratios (or "P/S") above 0.7x, Japfa Ltd. (SGX:UD2) looks to be giving off some buy signals 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.

What Does Japfa's P/S Mean For Shareholders?

Recent times have been pleasing for Japfa as its revenue has risen in spite of the industry's average revenue going into reverse. 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.

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.

Retrospectively, the last year delivered a decent 6.9% gain to the company's revenues. Revenue has also lifted 6.2% 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 respectable for the company.

Turning to the outlook, the next year should bring diminished returns, with revenue decreasing 2.7% as estimated by the dual analysts watching the company. That's not great when the rest of the industry is expected to grow by 1.6%.

With this information, we are not surprised that Japfa is trading at a P/S lower than the industry. However, shrinking revenues are unlikely to lead to a stable P/S over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Final Word

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.

It's clear to see that Japfa maintains its low P/S on the weakness of its forecast for sliding revenue, as expected. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. 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 makes us a bit uncomfortable!) you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com