Risks Still Elevated At These Prices As Daechang Solution Co., Ltd. (KOSDAQ:096350) Shares Dive 29%

Daechang Solution Co., Ltd. (KOSDAQ:096350) shares have retraced a considerable 29% in the last month, reversing a fair amount of their solid recent performance. Longer-term, the stock has been solid despite a difficult 30 days, gaining 10% in the last year.

Even after such a large drop in price, you could still be forgiven for feeling indifferent about Daechang Solution's P/S ratio of 1.3x, since the median price-to-sales (or "P/S") ratio for the Machinery industry in Korea is also close to 1.2x. 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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Check out our latest analysis for Daechang Solution

How Daechang Solution Has Been Performing

As an illustration, revenue has deteriorated at Daechang Solution over the last year, which is not ideal at all. Perhaps investors believe the recent revenue performance is enough to keep in line with the industry, which is keeping the P/S from dropping off. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

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

How Is Daechang Solution's Revenue Growth Trending?

In order to justify its P/S ratio, Daechang Solution would need to produce growth that's similar to the industry.

Retrospectively, the last year delivered a frustrating 20% decrease to the company's top line. Regardless, revenue has managed to lift by a handy 5.6% in aggregate from three years ago, thanks to the earlier period of growth. So we can start by confirming that the company has generally done a 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 14% 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 intriguing that Daechang Solution's P/S is comparable to that of its industry peers. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as a continuation of recent revenue trends is likely to weigh down the shares eventually.

The Key Takeaway

Daechang Solution's plummeting stock price has brought its P/S back to a similar region as the rest of the industry. 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.

Our examination of Daechang Solution revealed its poor three-year revenue trends aren't resulting in a lower P/S as per our expectations, given they look worse than current industry outlook. When we see weak revenue with slower than industry growth, we suspect the share price is at risk of declining, bringing the P/S back in line with expectations. If recent medium-term revenue trends continue, the probability of a share price decline will become quite substantial, placing shareholders at risk.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Daechang Solution that you should be aware of.

If you're unsure about the strength of Daechang Solution'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.