Optimistic Investors Push STX Engine Co.,Ltd. (KRX:077970) Shares Up 27% But Growth Is Lacking

STX Engine Co.,Ltd. (KRX:077970) shares have continued their recent momentum with a 27% gain in the last month alone. The last month tops off a massive increase of 126% in the last year.

In spite of the firm bounce in price, it's still not a stretch to say that STX EngineLtd's price-to-sales (or "P/S") ratio of 1.1x right now seems quite "middle-of-the-road" compared to the Machinery industry in Korea, where the median P/S ratio is around 1x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

See our latest analysis for STX EngineLtd

What Does STX EngineLtd's P/S Mean For Shareholders?

Recent times haven't been great for STX EngineLtd 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. However, if this isn't the case, investors might get caught out paying too much for the stock.

Keen to find out how analysts think STX EngineLtd's future stacks up against the industry? In that case, our free report is a great place to start.

How Is STX EngineLtd's Revenue Growth Trending?

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

Taking a look back first, we see that the company grew revenue by an impressive 18% last year. Pleasingly, revenue has also lifted 37% 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 one analyst covering the company suggest revenue should grow by 10% over the next year. With the industry predicted to deliver 26% growth, the company is positioned for a weaker revenue result.

With this in mind, we find it intriguing that STX EngineLtd's P/S is closely matching its industry peers. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

The Bottom Line On STX EngineLtd's P/S

STX EngineLtd's stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. 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.

Our look at the analysts forecasts of STX EngineLtd's revenue prospects has shown that its inferior revenue outlook isn't negatively impacting its P/S as much as we would have predicted. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. A positive change is needed in order to justify the current price-to-sales ratio.

Before you take the next step, you should know about the 2 warning signs for STX EngineLtd (1 doesn't sit too well with us!) that we have uncovered.

If these risks are making you reconsider your opinion on STX EngineLtd, 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.