LMS Co., Ltd. (KOSDAQ:073110) Surges 32% Yet Its Low P/S Is No Reason For Excitement

LMS Co., Ltd. (KOSDAQ:073110) shareholders would be excited to see that the share price has had a great month, posting a 32% gain and recovering from prior weakness. While recent buyers may be laughing, long-term holders might not be as pleased since the recent gain only brings the stock back to where it started a year ago.

Even after such a large jump in price, LMS' price-to-sales (or "P/S") ratio of 0.6x might still make it look like a buy right now compared to the Electrical industry in Korea, where around half of the companies have P/S ratios above 1.3x and even P/S above 4x are quite common. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for LMS

How LMS Has Been Performing

As an illustration, revenue has deteriorated at LMS over the last year, which is not ideal at all. Perhaps the market believes the recent revenue performance isn't good enough to keep up the industry, causing the P/S ratio to suffer. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

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 LMS' earnings, revenue and cash flow.

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

LMS' P/S ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 23%. As a result, revenue from three years ago have also fallen 37% overall. 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 a contraction of 6.3% shows the industry is more attractive on an annualised basis regardless.

With this in consideration, it's no surprise that LMS' P/S falls short of its industry peers. Nonetheless, with revenue going quickly in reverse, it's not guaranteed that the P/S has found a floor yet. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth, which would be difficult to do with the current industry outlook.

What Does LMS' P/S Mean For Investors?

The latest share price surge wasn't enough to lift LMS' P/S close to the industry median. 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.

It's clear that LMS trades at a low P/S relative to the wider industry on the weakness of its recent three-year revenue being even worse than the forecasts for a struggling industry, as expected. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. However, we're still cautious about the company's ability to prevent an acceleration of its recent medium-term course and resist even greater pain to its business from the broader industry turmoil. For now though, it's hard to see the share price rising strongly in the near future under these circumstances.

Plus, you should also learn about these 3 warning signs we've spotted with LMS (including 1 which is potentially serious).

If these risks are making you reconsider your opinion on LMS, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.