Optimistic Investors Push Hanwha Ocean Co., Ltd. (KRX:042660) Shares Up 38% But Growth Is Lacking

Hanwha Ocean Co., Ltd. (KRX:042660) shares have continued their recent momentum with a 38% gain in the last month alone. The annual gain comes to 233% following the latest surge, making investors sit up and take notice.

After such a large jump in price, when almost half of the companies in Korea's Machinery industry have price-to-sales ratios (or "P/S") below 1x, you may consider Hanwha Ocean as a stock probably not worth researching with its 2.3x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

Check out our latest analysis for Hanwha Ocean

How Has Hanwha Ocean Performed Recently?

Recent times have been advantageous for Hanwha Ocean as its revenues have been rising faster than most other companies. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. If not, then existing shareholders might be a little nervous about the viability of the share price.

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

Do Revenue Forecasts Match The High P/S Ratio?

The only time you'd be truly comfortable seeing a P/S as high as Hanwha Ocean's is when the company's growth is on track to outshine the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 47%. Pleasingly, revenue has also lifted 103% in aggregate from three years ago, thanks to the last 12 months of growth. 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 9.1% per annum over the next three years. With the industry predicted to deliver 11% growth per annum, the company is positioned for a comparable revenue result.

In light of this, it's curious that Hanwha Ocean's P/S sits above the majority of other companies. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as this level of revenue growth is likely to weigh down the share price eventually.

What We Can Learn From Hanwha Ocean's P/S?

Hanwha Ocean shares have taken a big step in a northerly direction, but its P/S is elevated as a result. 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.

Seeing as its revenues are forecast to grow in line with the wider industry, it would appear that Hanwha Ocean currently trades on a higher than expected P/S. Right now we are uncomfortable with the relatively high share price as the predicted future revenues aren't likely to support such positive sentiment for long. A positive change is needed in order to justify the current price-to-sales ratio.

It is also worth noting that we have found 3 warning signs for Hanwha Ocean (2 are potentially serious!) that you need to take into consideration.

If you're unsure about the strength of Hanwha Ocean's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.