Eco&Dream Co., Ltd.'s (KOSDAQ:101360) 35% Share Price Plunge Could Signal Some Risk

Eco&Dream Co., Ltd. (KOSDAQ:101360) shares have had a horrible month, losing 35% after a relatively good period beforehand. Looking at the bigger picture, even after this poor month the stock is up 54% in the last year.

Even after such a large drop in price, given around half the companies in Korea's Auto Components industry have price-to-sales ratios (or "P/S") below 0.2x, you may still consider Eco&Dream as a stock to avoid entirely with its 5.5x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Eco&Dream

What Does Eco&Dream's Recent Performance Look Like?

With revenue growth that's exceedingly strong of late, Eco&Dream has been doing very well. It seems that many are expecting the strong 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 might be a little nervous about the viability of the share price.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Eco&Dream will help you shine a light on its historical performance.

Do Revenue Forecasts Match The High P/S Ratio?

The only time you'd be truly comfortable seeing a P/S as steep as Eco&Dream's is when the company's growth is on track to outshine the industry decidedly.

Retrospectively, the last year delivered an exceptional 57% gain to the company's top line. Revenue has also lifted 7.4% in aggregate from three years ago, mostly thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 4.9% shows it's noticeably less attractive.

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

What Does Eco&Dream's P/S Mean For Investors?

A significant share price dive has done very little to deflate Eco&Dream's very lofty P/S. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of Eco&Dream revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. When we see slower than industry revenue growth but an elevated P/S, there's considerable risk of the share price declining, sending the P/S lower. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

Plus, you should also learn about these 4 warning signs we've spotted with Eco&Dream (including 2 which are potentially serious).

If these risks are making you reconsider your opinion on Eco&Dream, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.