Doosan Enerbility Co., Ltd.'s (KRX:034020) Shares Climb 35% But Its Business Is Yet to Catch Up

Doosan Enerbility Co., Ltd. (KRX:034020) shareholders would be excited to see that the share price has had a great month, posting a 35% gain and recovering from prior weakness. The last 30 days bring the annual gain to a very sharp 63%.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about Doosan Enerbility's P/S ratio of 1x, since the median price-to-sales (or "P/S") ratio for the Electrical industry in Korea is about the same. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

Check out our latest analysis for Doosan Enerbility

What Does Doosan Enerbility's Recent Performance Look Like?

Doosan Enerbility has been doing a reasonable job lately as its revenue hasn't declined as much as most other companies. One possibility is that the P/S ratio is moderate because investors think this relatively better revenue performance might be about to evaporate. You'd much rather the company continue improving its revenue if you still believe in the business. But at the very least, you'd be hoping the company doesn't fall back into the pack if your plan is to pick up some stock while it's not in favour.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Doosan Enerbility.

How Is Doosan Enerbility's Revenue Growth Trending?

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

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 4.9%. However, a few very strong years before that means that it was still able to grow revenue by an impressive 94% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been more than adequate for the company.

Looking ahead now, revenue is anticipated to climb by 4.0% per annum during the coming three years according to the five analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 21% per year, which is noticeably more attractive.

With this in mind, we find it intriguing that Doosan Enerbility's P/S is closely matching its industry peers. 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 Final Word

Its shares have lifted substantially and now Doosan Enerbility's P/S is back within range of the industry median. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Given that Doosan Enerbility's revenue growth projections are relatively subdued in comparison to the wider industry, it comes as a surprise to see it 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. A positive change is needed in order to justify the current price-to-sales ratio.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Doosan Enerbility that you should be aware of.

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.