Samsung Heavy Industries Co., Ltd.'s (KRX:010140) Price Is Out Of Tune With Revenues

With a median price-to-sales (or "P/S") ratio of close to 0.9x in the Machinery industry in Korea, you could be forgiven for feeling indifferent about Samsung Heavy Industries Co., Ltd.'s (KRX:010140) P/S ratio of 1.1x. 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 Samsung Heavy Industries

How Has Samsung Heavy Industries Performed Recently?

Recent times have been advantageous for Samsung Heavy Industries as its revenues have been rising faster than most other companies. It might be that many expect the strong revenue performance to wane, which has kept the P/S ratio from rising. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

Want the full picture on analyst estimates for the company? Then our free report on Samsung Heavy Industries will help you uncover what's on the horizon.

How Is Samsung Heavy Industries' Revenue Growth Trending?

In order to justify its P/S ratio, Samsung Heavy Industries would need to produce growth that's similar to the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 42%. The latest three year period has also seen an excellent 41% overall rise in revenue, aided by its short-term performance. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Shifting to the future, estimates from the analysts covering the company suggest revenue should grow by 13% over the next year. With the industry predicted to deliver 33% growth, the company is positioned for a weaker revenue result.

In light of this, it's curious that Samsung Heavy Industries' P/S sits in line with the majority of other companies. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Bottom Line On Samsung Heavy Industries' P/S

We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

When you consider that Samsung Heavy Industries' 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.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Samsung Heavy Industries that you need to be mindful of.

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

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

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.