What Edge Foundry Co.,Ltd's (KOSDAQ:105550) 25% Share Price Gain Is Not Telling You

Edge Foundry Co.,Ltd (KOSDAQ:105550) shareholders would be excited to see that the share price has had a great month, posting a 25% gain and recovering from prior weakness. Taking a wider view, although not as strong as the last month, the full year gain of 20% is also fairly reasonable.

After such a large jump in price, when almost half of the companies in Korea's Auto Components industry have price-to-sales ratios (or "P/S") below 0.2x, you may consider Edge FoundryLtd as a stock not worth researching with its 5.2x 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.

Check out our latest analysis for Edge FoundryLtd

What Does Edge FoundryLtd's Recent Performance Look Like?

For example, consider that Edge FoundryLtd's financial performance has been poor lately as its revenue has been in decline. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.

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

How Is Edge FoundryLtd's Revenue Growth Trending?

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

Retrospectively, the last year delivered a frustrating 4.8% decrease to the company's top line. Regardless, revenue has managed to lift by a handy 13% in aggregate from three years ago, thanks to the earlier period of growth. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of revenue growth.

Weighing that recent medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 5.0% shows it's about the same on an annualised basis.

With this information, we find it interesting that Edge FoundryLtd is trading at a high P/S compared to the industry. Apparently many investors in the company are more bullish than recent times would indicate and aren't willing to let go of their stock right now. Nevertheless, they may be setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Bottom Line On Edge FoundryLtd's P/S

The strong share price surge has lead to Edge FoundryLtd's P/S soaring as well. 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.

Our look into Edge FoundryLtd has shown that it currently trades on a higher than expected P/S since its recent three-year growth is only in line with the wider industry forecast. Right now we are uncomfortable with the high P/S as this revenue performance isn't likely to support such positive sentiment for long. Unless there is a significant improvement in the company's medium-term trends, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Edge FoundryLtd (at least 2 which can't be ignored), and understanding them should be part of your investment process.

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.

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

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.