What Mobile Appliance, Inc.'s (KOSDAQ:087260) P/S Is Not Telling You

When close to half the companies in the Auto Components industry in Korea have price-to-sales ratios (or "P/S") below 0.2x, you may consider Mobile Appliance, Inc. (KOSDAQ:087260) as a stock to potentially avoid with its 1.6x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

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See our latest analysis for Mobile Appliance

What Does Mobile Appliance's P/S Mean For Shareholders?

Revenue has risen firmly for Mobile Appliance recently, which is pleasing to see. It might be that many expect the respectable revenue performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders may be a little nervous about the viability of the share price.

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 Mobile Appliance's earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For Mobile Appliance?

In order to justify its P/S ratio, Mobile Appliance would need to produce impressive growth in excess of the industry.

Taking a look back first, we see that the company grew revenue by an impressive 20% last year. However, this wasn't enough as the latest three year period has seen the company endure a nasty 7.4% drop in revenue in aggregate. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 10.0% shows it's an unpleasant look.

With this in mind, we find it worrying that Mobile Appliance's P/S exceeds that of its industry peers. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

The Bottom Line On Mobile Appliance's P/S

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 established that Mobile Appliance currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Mobile Appliance that you should be aware of.

If you're unsure about the strength of Mobile Appliance's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.