Posco Future M Co., Ltd. (KRX:003670) May Have Run Too Fast Too Soon With Recent 26% Price Plummet

Posco Future M Co., Ltd. (KRX:003670) shareholders won't be pleased to see that the share price has had a very rough month, dropping 26% and undoing the prior period's positive performance. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 45% share price drop.

Even after such a large drop in price, you could still be forgiven for thinking Posco Future M is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 3.4x, considering almost half the companies in Korea's Electrical industry have P/S ratios below 0.9x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Posco Future M

What Does Posco Future M's P/S Mean For Shareholders?

With only a limited decrease in revenue compared to most other companies of late, Posco Future M has been doing relatively well. It seems that many are expecting the comparatively superior revenue performance to persist, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price, especially if revenue continues to dissolve.

Want the full picture on analyst estimates for the company? Then our free report on Posco Future M will help you uncover what's on the horizon.

Is There Enough Revenue Growth Forecasted For Posco Future M?

In order to justify its P/S ratio, Posco Future M would need to produce outstanding growth that's well in excess of the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 6.2%. Still, the latest three year period has seen an excellent 117% overall rise in revenue, in spite of its unsatisfying short-term performance. Accordingly, while they would have preferred to keep the run going, shareholders would definitely welcome the medium-term rates of revenue growth.

Turning to the outlook, the next three years should generate growth of 18% each year as estimated by the analysts watching the company. With the industry predicted to deliver 22% growth each year, the company is positioned for a weaker revenue result.

With this information, we find it concerning that Posco Future M is trading at a P/S higher than the industry. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

What Does Posco Future M's P/S Mean For Investors?

Even after such a strong price drop, Posco Future M's P/S still exceeds the industry median significantly. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

It comes as a surprise to see Posco Future M trade at such a high P/S given the revenue forecasts look less than stellar. Right now we aren't comfortable with the high P/S as the predicted future revenues aren't likely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Posco Future M (of which 1 doesn't sit too well with us!) you should know about.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.