What HD-Hyundai Marine Engine Co., Ltd.'s (KRX:071970) 30% Share Price Gain Is Not Telling You

The HD-Hyundai Marine Engine Co., Ltd. (KRX:071970) share price has done very well over the last month, posting an excellent gain of 30%. The last month tops off a massive increase of 119% in the last year.

Following the firm bounce in price, given close to half the companies operating in Korea's Machinery industry have price-to-sales ratios (or "P/S") below 0.9x, you may consider HD-Hyundai Marine Engine as a stock to potentially avoid with its 2.7x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

View our latest analysis for HD-Hyundai Marine Engine

How Has HD-Hyundai Marine Engine Performed Recently?

With revenue growth that's superior to most other companies of late, HD-Hyundai Marine Engine has been doing relatively well. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. However, if this isn't the case, investors might get caught out paying too much for the stock.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on HD-Hyundai Marine Engine.

Do Revenue Forecasts Match The High P/S Ratio?

HD-Hyundai Marine Engine's P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

Taking a look back first, we see that the company grew revenue by an impressive 33% last year. The latest three year period has also seen an excellent 66% overall rise in revenue, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing revenue over that time.

Shifting to the future, estimates from the one analyst covering the company suggest revenue growth is heading into negative territory, declining 100% over the next year. With the industry predicted to deliver 37% growth, that's a disappointing outcome.

With this in mind, we find it intriguing that HD-Hyundai Marine Engine's P/S is closely matching its industry peers. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as these declining revenues are likely to weigh heavily on the share price eventually.

What Does HD-Hyundai Marine Engine's P/S Mean For Investors?

HD-Hyundai Marine Engine's P/S is on the rise since its shares have risen strongly. 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.

For a company with revenues that are set to decline in the context of a growing industry, HD-Hyundai Marine Engine's P/S is much higher than we would've anticipated. Right now we aren't comfortable with the high P/S as the predicted future revenue decline likely to impact the positive sentiment that's propping up the P/S. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Plus, you should also learn about these 2 warning signs we've spotted with HD-Hyundai Marine Engine (including 1 which is potentially serious).

If these risks are making you reconsider your opinion on HD-Hyundai Marine Engine, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.