HD Korea Shipbuilding & Offshore Engineering Co., Ltd.'s (KRX:009540) 28% Price Boost Is Out Of Tune With Revenues

HD Korea Shipbuilding & Offshore Engineering Co., Ltd. (KRX:009540) shares have continued their recent momentum with a 28% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 43%.

Although its price has surged higher, it's still not a stretch to say that HD Korea Shipbuilding & Offshore Engineering's price-to-sales (or "P/S") ratio of 0.6x right now seems quite "middle-of-the-road" compared to the Machinery industry in Korea, where the median P/S ratio is around 1x. 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 HD Korea Shipbuilding & Offshore Engineering

How Has HD Korea Shipbuilding & Offshore Engineering Performed Recently?

Recent times haven't been great for HD Korea Shipbuilding & Offshore Engineering as its revenue has been rising slower than most other companies. Perhaps the market is expecting future revenue performance to lift, which has kept the P/S from declining. If not, then existing shareholders may be a little nervous about the viability of the share price.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on HD Korea Shipbuilding & Offshore Engineering.

Do Revenue Forecasts Match The P/S Ratio?

There's an inherent assumption that a company should be matching the industry for P/S ratios like HD Korea Shipbuilding & Offshore Engineering's to be considered reasonable.

If we review the last year of revenue growth, the company posted a terrific increase of 20%. Pleasingly, revenue has also lifted 50% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Looking ahead now, revenue is anticipated to climb by 13% during the coming year according to the analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 34%, which is noticeably more attractive.

With this information, we find it interesting that HD Korea Shipbuilding & Offshore Engineering is trading at a fairly similar P/S compared to the industry. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

The Key Takeaway

HD Korea Shipbuilding & Offshore Engineering's stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. 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.

When you consider that HD Korea Shipbuilding & Offshore Engineering's revenue growth estimates are fairly muted compared to the broader industry, it's easy to see why we consider it unexpected to be trading at its current P/S ratio. At present, we aren't confident in the P/S as the predicted future revenues aren't likely to support a more positive sentiment for long. Circumstances like this present a risk to current and prospective investors who may see share prices fall if the low revenue growth impacts the sentiment.

A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for HD Korea Shipbuilding & Offshore Engineering with six simple checks will allow you to discover any risks that could be an issue.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.

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