Why We're Not Concerned About Iljin Hysolus Co., Ltd.'s (KRX:271940) Share Price

When you see that almost half of the companies in the Auto Components industry in Korea have price-to-sales ratios (or "P/S") below 0.2x, Iljin Hysolus Co., Ltd. (KRX:271940) looks to be giving off strong sell signals with its 8.5x 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.

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See our latest analysis for Iljin Hysolus

What Does Iljin Hysolus' P/S Mean For Shareholders?

There hasn't been much to differentiate Iljin Hysolus' and the industry's revenue growth lately. It might be that many expect the mediocre revenue performance to strengthen positively, which has kept the P/S ratio from falling. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Want the full picture on analyst estimates for the company? Then our free report on Iljin Hysolus will help you uncover what's on the horizon.

What Are Revenue Growth Metrics Telling Us About The High P/S?

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

If we review the last year of revenue growth, the company posted a worthy increase of 12%. Ultimately though, it couldn't turn around the poor performance of the prior period, with revenue shrinking 30% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 28% during the coming year according to the two analysts following the company. That's shaping up to be materially higher than the 11% growth forecast for the broader industry.

With this in mind, it's not hard to understand why Iljin Hysolus' P/S is high relative to its industry peers. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

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.

As we suspected, our examination of Iljin Hysolus' analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for Iljin Hysolus with six simple checks will allow you to discover any risks that could be an issue.

If you're unsure about the strength of Iljin Hysolus' 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.