Investors Appear Satisfied With Dongsin Engineering & Construction's (KOSDAQ:025950) Prospects As Shares Rocket 34%

Dongsin Engineering & Construction (KOSDAQ:025950) shares have had a really impressive month, gaining 34% after a shaky period beforehand. The annual gain comes to 147% following the latest surge, making investors sit up and take notice.

Following the firm bounce in price, when almost half of the companies in Korea's Construction industry have price-to-sales ratios (or "P/S") below 0.2x, you may consider Dongsin Engineering & Construction as a stock not worth researching with its 8.2x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

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Check out our latest analysis for Dongsin Engineering & Construction

How Has Dongsin Engineering & Construction Performed Recently?

As an illustration, revenue has deteriorated at Dongsin Engineering & Construction 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. If not, then existing shareholders may be quite 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 Dongsin Engineering & Construction will help you shine a light on its historical performance.

Do Revenue Forecasts Match The High P/S Ratio?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Dongsin Engineering & Construction's to be considered reasonable.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 17%. That put a dampener on the good run it was having over the longer-term as its three-year revenue growth is still a noteworthy 20% in total. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been mostly respectable for the company.

Comparing that recent medium-term revenue trajectory with the industry's one-year growth forecast of 0.06% shows it's noticeably more attractive.

In light of this, it's understandable that Dongsin Engineering & Construction's P/S sits above the majority of other companies. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

The Bottom Line On Dongsin Engineering & Construction's P/S

The strong share price surge has lead to Dongsin Engineering & Construction's P/S soaring as well. 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 Dongsin Engineering & Construction maintains its high P/S on the strength of its recent three-year growth being higher than the wider industry forecast, as expected. Right now shareholders are comfortable with the P/S as they are quite confident revenue aren't under threat. If recent medium-term revenue trends continue, it's hard to see the share price falling strongly in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Dongsin Engineering & Construction (of which 1 is concerning!) you should know about.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.