There's Reason For Concern Over Sangji Construction, Inc.'s (KOSDAQ:042940) Massive 36% Price Jump

Sangji Construction, Inc. (KOSDAQ:042940) shares have had a really impressive month, gaining 36% after a shaky period beforehand. But the last month did very little to improve the 57% share price decline over the last year.

After such a large jump in price, given close to half the companies operating in Korea's Construction industry have price-to-sales ratios (or "P/S") below 0.2x, you may consider Sangji Construction as a stock to potentially avoid with its 1x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

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View our latest analysis for Sangji Construction

How Sangji Construction Has Been Performing

As an illustration, revenue has deteriorated at Sangji 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.

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

Is There Enough Revenue Growth Forecasted For Sangji Construction?

The only time you'd be truly comfortable seeing a P/S as high as Sangji Construction's is when the company's growth is on track to outshine the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 88%. The last three years don't look nice either as the company has shrunk revenue by 19% 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 0.2% shows it's an unpleasant look.

In light of this, it's alarming that Sangji Construction's P/S sits above the majority of other companies. 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 Bottom Line On Sangji Construction's P/S

Sangji Construction's P/S is on the rise since its shares have risen strongly. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Sangji Construction 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. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You should always think about risks. Case in point, we've spotted 2 warning signs for Sangji Construction you should be aware of, and 1 of them can't be ignored.

If you're unsure about the strength of Sangji Construction's 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.