Subdued Growth No Barrier To HNK Machine Tool Co., Ltd. (KOSDAQ:101680) With Shares Advancing 133%

HNK Machine Tool Co., Ltd. (KOSDAQ:101680) shareholders would be excited to see that the share price has had a great month, posting a 133% gain and recovering from prior weakness. Looking back a bit further, it's encouraging to see the stock is up 90% in the last year.

Even after such a large jump in price, there still wouldn't be many who think HNK Machine Tool's price-to-sales (or "P/S") ratio of 0.6x is worth a mention when the median P/S in Korea's Machinery industry is similar at about 0.9x. 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.

View our latest analysis for HNK Machine Tool

What Does HNK Machine Tool's Recent Performance Look Like?

HNK Machine Tool certainly has been doing a great job lately as it's been growing its revenue at a really rapid pace. It might be that many expect the strong revenue performance to wane, which has kept the share price, and thus the P/S ratio, 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 HNK Machine Tool's earnings, revenue and cash flow.

Is There Some Revenue Growth Forecasted For HNK Machine Tool?

There's an inherent assumption that a company should be matching the industry for P/S ratios like HNK Machine Tool's to be considered reasonable.

Taking a look back first, we see that the company grew revenue by an impressive 48% last year. The latest three year period has also seen an incredible overall rise in revenue, aided by its incredible short-term performance. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 100% shows it's noticeably less attractive.

With this in mind, we find it intriguing that HNK Machine Tool'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 Bottom Line On HNK Machine Tool's P/S

Its shares have lifted substantially and now HNK Machine Tool's P/S is back within range of the industry median. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that HNK Machine Tool's average P/S is a bit surprising since its recent three-year growth is lower than the wider industry forecast. Right now we are uncomfortable with the P/S as this revenue performance isn't likely to support a more positive sentiment for long. If recent medium-term revenue trends continue, the probability of a share price decline will become quite substantial, placing shareholders at risk.

It is also worth noting that we have found 2 warning signs for HNK Machine Tool (1 doesn't sit too well with us!) that you need to take into consideration.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.