Improved Revenues Required Before Daedong Corporation (KRX:000490) Stock's 28% Jump Looks Justified

Despite an already strong run, Daedong Corporation (KRX:000490) shares have been powering on, with a gain of 28% in the last thirty days. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 18% in the last twelve months.

In spite of the firm bounce in price, given about half the companies operating in Korea's Machinery industry have price-to-sales ratios (or "P/S") above 1x, you may still consider Daedong as an attractive investment with its 0.2x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

View our latest analysis for Daedong

How Daedong Has Been Performing

As an illustration, revenue has deteriorated at Daedong over the last year, which is not ideal at all. Perhaps the market believes the recent revenue performance isn't good enough to keep up the industry, causing the P/S ratio to suffer. 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 out of favour.

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

What Are Revenue Growth Metrics Telling Us About The Low P/S?

In order to justify its P/S ratio, Daedong would need to produce sluggish growth that's trailing 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 9.6%. Regardless, revenue has managed to lift by a handy 23% in aggregate from three years ago, thanks to the earlier period of growth. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of revenue growth.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 45% shows it's noticeably less attractive.

With this in consideration, it's easy to understand why Daedong's P/S falls short of the mark set by its industry peers. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the wider industry.

The Bottom Line On Daedong's P/S

The latest share price surge wasn't enough to lift Daedong's P/S close to the industry median. 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.

In line with expectations, Daedong maintains its low P/S on the weakness of its recent three-year growth being lower than the wider industry forecast. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. If recent medium-term revenue trends continue, it's hard to see the share price experience a reversal of fortunes anytime soon.

Having said that, be aware Daedong is showing 3 warning signs in our investment analysis, and 2 of those make us uncomfortable.

If you're unsure about the strength of Daedong'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.