KC Cottrell Co., Ltd. (KRX:119650) Surges 56% Yet Its Low P/S Is No Reason For Excitement

KC Cottrell Co., Ltd. (KRX:119650) shareholders are no doubt pleased to see that the share price has bounced 56% in the last month, although it is still struggling to make up recently lost ground. But the last month did very little to improve the 58% share price decline over the last year.

Even after such a large jump in price, considering around half the companies operating in Korea's Machinery industry have price-to-sales ratios (or "P/S") above 0.9x, you may still consider KC Cottrell as an solid investment opportunity with its 0.1x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

Check out our latest analysis for KC Cottrell

How Has KC Cottrell Performed Recently?

As an illustration, revenue has deteriorated at KC Cottrell over the last year, which is not ideal at all. It might be that many expect the disappointing revenue performance to continue or accelerate, which has repressed the P/S. Those who are bullish on KC Cottrell will be hoping that this isn't the case so that they can pick up the stock at a lower valuation.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on KC Cottrell's earnings, revenue and cash flow.

Is There Any Revenue Growth Forecasted For KC Cottrell?

KC Cottrell's P/S ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the industry.

Retrospectively, the last year delivered a frustrating 17% decrease to the company's top line. Even so, admirably revenue has lifted 32% in aggregate from three years ago, notwithstanding the last 12 months. So we can start by confirming that the company has generally done a very good job of growing revenue over that time, even though it had some hiccups along the way.

This is in contrast to the rest of the industry, which is expected to grow by 38% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we can see why KC Cottrell is trading at a P/S lower than the industry. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the wider industry.

The Final Word

Despite KC Cottrell's share price climbing recently, its P/S still lags most other companies. 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.

As we suspected, our examination of KC Cottrell revealed its three-year revenue trends are contributing to its low P/S, given they look worse than current industry expectations. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. If recent medium-term revenue trends continue, it's hard to see the share price experience a reversal of fortunes anytime soon.

There are also other vital risk factors to consider and we've discovered 6 warning signs for KC Cottrell (4 don't sit too well with us!) that you should be aware of before investing here.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.