EXA E&C Inc.'s (KOSDAQ:054940) Price In Tune With Revenues

There wouldn't be many who think EXA E&C Inc.'s (KOSDAQ:054940) price-to-sales (or "P/S") ratio of 0.1x is worth a mention when the median P/S for the Construction industry in Korea is similar at about 0.2x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

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View our latest analysis for EXA E&C

What Does EXA E&C's P/S Mean For Shareholders?

EXA E&C has been doing a good job lately as it's been growing revenue at a solid pace. It might be that many expect the respectable revenue performance to wane, which has kept the P/S from rising. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on EXA E&C's earnings, revenue and cash flow.

How Is EXA E&C's Revenue Growth Trending?

The only time you'd be comfortable seeing a P/S like EXA E&C's is when the company's growth is tracking the industry closely.

Taking a look back first, we see that the company grew revenue by an impressive 17% last year. However, this wasn't enough as the latest three year period has seen the company endure a nasty 8.0% drop in revenue in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

It turns out the industry is also predicted to shrink 1.1% in the next 12 months, mirroring the company's downward momentum based on recent medium-term annualised revenue results.

In light of this, it's understandable that EXA E&C's P/S sits in line with the majority of other companies. However, shrinking revenues are unlikely to lead to a stable P/S long-term, which could set up shareholders for future disappointment regardless. Maintaining these prices will be difficult to achieve as a continuation of recent revenue trends is likely to weigh down the shares eventually.

The Final Word

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.

As expected, our analysis of EXA E&C confirms that the company's contraction in revenue over the past three-year years is a major contributor to its industry-matching P/S, given the industry is set to decline in a similar fashion. At this stage investors feel the company's revenue potential is similar enough to its peers that it doesn't warrant a higher or lower P/S. However, we're slightly cautious about the company's ability to stay its recent medium-term course and resist further pain to its business from the broader industry turmoil. In the meantime, unless the company's relative performance changes, the share price should find support at these levels.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with EXA E&C, and understanding should be part of your investment process.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.