What Eco&Dream Co., Ltd.'s (KOSDAQ:101360) 183% Share Price Gain Is Not Telling You

Eco&Dream Co., Ltd. (KOSDAQ:101360) shares have continued their recent momentum with a 183% gain in the last month alone. The annual gain comes to 155% following the latest surge, making investors sit up and take notice.

After such a large jump in price, you could be forgiven for thinking Eco&Dream is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 15.2x, considering almost half the companies in Korea's Auto Components industry have P/S ratios below 0.2x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Eco&Dream

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

As an illustration, revenue has deteriorated at Eco&Dream over the last year, which is not ideal at all. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Although there are no analyst estimates available for Eco&Dream, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Eco&Dream's Revenue Growth Trending?

In order to justify its P/S ratio, Eco&Dream would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered a frustrating 18% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 43% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 4.4% shows it's an unpleasant look.

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 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 Final Word

Shares in Eco&Dream have seen a strong upwards swing lately, which has really helped boost its P/S figure. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

We've established that Eco&Dream 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 the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

You should always think about risks. Case in point, we've spotted 3 warning signs for Eco&Dream you should be aware of, and 2 of them make us uncomfortable.

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.