TERA SCIENCE.Co.,LTD's (KOSDAQ:073640) 55% Price Boost Is Out Of Tune With Revenues

Those holding TERA SCIENCE.Co.,LTD (KOSDAQ:073640) shares would be relieved that the share price has rebounded 55% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 33% in the last twelve months.

Since its price has surged higher, you could be forgiven for thinking TERA SCIENCE.Co.LTD is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 5.8x, considering almost half the companies in Korea's Machinery industry have P/S ratios below 0.9x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for TERA SCIENCE.Co.LTD

How TERA SCIENCE.Co.LTD Has Been Performing

As an illustration, revenue has deteriorated at TERA SCIENCE.Co.LTD over the last year, which is not ideal at all. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on TERA SCIENCE.Co.LTD will help you shine a light on its historical performance.

How Is TERA SCIENCE.Co.LTD's Revenue Growth Trending?

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

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 2.8%. Even so, admirably revenue has lifted 68% in aggregate from three years ago, notwithstanding the last 12 months. So we can start by confirming that the company has generally done a very good job of growing revenue over that time, even though it had some hiccups along the way.

Comparing that to the industry, which is predicted to deliver 32% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

With this in mind, we find it worrying that TERA SCIENCE.Co.LTD's P/S exceeds that of its industry peers. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Bottom Line On TERA SCIENCE.Co.LTD's P/S

TERA SCIENCE.Co.LTD's P/S has grown nicely over the last month thanks to a handy boost in the share price. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

The fact that TERA SCIENCE.Co.LTD currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. When we see slower than industry revenue growth but an elevated P/S, there's considerable risk of the share price declining, sending the P/S lower. 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.

Having said that, be aware TERA SCIENCE.Co.LTD is showing 2 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.