There's Reason For Concern Over WOORIM POWER TRAIN SOLUTION Co., Ltd.'s (KOSDAQ:101170) Massive 38% Price Jump

Despite an already strong run, WOORIM POWER TRAIN SOLUTION Co., Ltd. (KOSDAQ:101170) shares have been powering on, with a gain of 38% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 40% in the last year.

Since its price has surged higher, when almost half of the companies in Korea's Machinery industry have price-to-sales ratios (or "P/S") below 1.2x, you may consider WOORIM POWER TRAIN SOLUTION as a stock probably not worth researching with its 1.9x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

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Check out our latest analysis for WOORIM POWER TRAIN SOLUTION

How WOORIM POWER TRAIN SOLUTION Has Been Performing

As an illustration, revenue has deteriorated at WOORIM POWER TRAIN SOLUTION 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. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

Do Revenue Forecasts Match The High P/S Ratio?

The only time you'd be truly comfortable seeing a P/S as high as WOORIM POWER TRAIN SOLUTION'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 28%. The last three years don't look nice either as the company has shrunk revenue by 13% in aggregate. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

In contrast to the company, the rest of the industry is expected to grow by 16% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this information, we find it concerning that WOORIM POWER TRAIN SOLUTION is trading at a P/S higher than the industry. 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.

What Does WOORIM POWER TRAIN SOLUTION's P/S Mean For Investors?

The large bounce in WOORIM POWER TRAIN SOLUTION's shares has lifted the company's P/S handsomely. 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.

We've established that WOORIM POWER TRAIN SOLUTION currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

And what about other risks? Every company has them, and we've spotted 2 warning signs for WOORIM POWER TRAIN SOLUTION you should know about.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.