What Kumho Electric, Inc.'s (KRX:001210) 49% Share Price Gain Is Not Telling You

Kumho Electric, Inc. (KRX:001210) shareholders would be excited to see that the share price has had a great month, posting a 49% gain and recovering from prior weakness. Looking further back, the 13% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

Even after such a large jump in price, it's still not a stretch to say that Kumho Electric's price-to-sales (or "P/S") ratio of 1x right now seems quite "middle-of-the-road" compared to the Electrical industry in Korea, where the median P/S ratio is around 0.9x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

Check out our latest analysis for Kumho Electric

How Has Kumho Electric Performed Recently?

For example, consider that Kumho Electric's financial performance has been poor lately as its revenue has been in decline. One possibility is that the P/S is moderate because investors think the company might still do enough to be in line with the broader industry in the near future. 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.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Kumho Electric will help you shine a light on its historical performance.

Is There Some Revenue Growth Forecasted For Kumho Electric?

The only time you'd be comfortable seeing a P/S like Kumho Electric's is when the company's growth is tracking the industry closely.

Retrospectively, the last year delivered a frustrating 2.6% decrease to the company's top line. That put a dampener on the good run it was having over the longer-term as its three-year revenue growth is still a noteworthy 24% in total. 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 the recent medium-term revenue trends against the industry's one-year growth forecast of 13% shows it's noticeably less attractive.

With this information, we find it interesting that Kumho Electric is trading at a fairly similar P/S compared to the industry. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as a continuation of recent revenue trends is likely to weigh down the shares eventually.

The Final Word

Kumho Electric's stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Kumho Electric's average P/S is a bit surprising since its recent three-year growth is lower than the wider industry forecast. 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. Unless the recent medium-term conditions improve, it's hard to accept the current share price as fair value.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Kumho Electric (of which 1 is a bit concerning!) you should know about.

If these risks are making you reconsider your opinion on Kumho Electric, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.