Subdued Growth No Barrier To RS Automation Co.,Ltd. (KOSDAQ:140670) With Shares Advancing 37%

The RS Automation Co.,Ltd. (KOSDAQ:140670) share price has done very well over the last month, posting an excellent gain of 37%. Looking back a bit further, it's encouraging to see the stock is up 33% in the last year.

Since its price has surged higher, given close to half the companies operating in Korea's Electrical industry have price-to-sales ratios (or "P/S") below 1.1x, you may consider RS AutomationLtd as a stock to potentially avoid with its 2.3x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for RS AutomationLtd

What Does RS AutomationLtd's Recent Performance Look Like?

For instance, RS AutomationLtd's receding revenue in recent times would have to be some food for thought. 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Although there are no analyst estimates available for RS AutomationLtd, 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?

There's an inherent assumption that a company should outperform the industry for P/S ratios like RS AutomationLtd's to be considered reasonable.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 7.9%. This has erased any of its gains during the last three years, with practically no change in revenue being achieved in total. Therefore, it's fair to say that revenue growth has been inconsistent recently for the company.

Weighing that recent medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 2.0% shows it's about the same on an annualised basis.

With this in mind, we find it intriguing that RS AutomationLtd's P/S exceeds that of its industry peers. Apparently many investors in the company are more bullish than recent times would indicate and aren't willing to let go of their stock right now. Nevertheless, they may be setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

What We Can Learn From RS AutomationLtd's P/S?

RS AutomationLtd's P/S is on the rise since its shares have risen strongly. 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 didn't expect to see RS AutomationLtd trade at such a high P/S considering its last three-year revenue growth has only been on par with the rest of the industry. Right now we are uncomfortable with the high P/S as this revenue performance isn't likely to support such positive sentiment for long. Unless there is a significant improvement in the company's medium-term trends, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

Having said that, be aware RS AutomationLtd is showing 2 warning signs in our investment analysis, and 1 of those is potentially serious.

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.