HD Hyundai Heavy Industries Co.,Ltd. (KRX:329180) Stock Rockets 31% As Investors Are Less Pessimistic Than Expected

HD Hyundai Heavy Industries Co.,Ltd. (KRX:329180) shareholders would be excited to see that the share price has had a great month, posting a 31% gain and recovering from prior weakness. The last month tops off a massive increase of 194% in the last year.

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 HD Hyundai Heavy IndustriesLtd as a stock probably not worth researching with its 2.3x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

We've discovered 1 warning sign about HD Hyundai Heavy IndustriesLtd. View them for free.

See our latest analysis for HD Hyundai Heavy IndustriesLtd

What Does HD Hyundai Heavy IndustriesLtd's Recent Performance Look Like?

HD Hyundai Heavy IndustriesLtd's revenue growth of late has been pretty similar to most other companies. One possibility is that the P/S ratio is high because investors think this modest revenue performance will accelerate. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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How Is HD Hyundai Heavy IndustriesLtd's Revenue Growth Trending?

There's an inherent assumption that a company should outperform the industry for P/S ratios like HD Hyundai Heavy IndustriesLtd's to be considered reasonable.

Taking a look back first, we see that the company grew revenue by an impressive 21% last year. Pleasingly, revenue has also lifted 74% 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.

Looking ahead now, revenue is anticipated to climb by 9.4% each year during the coming three years according to the analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 11% per year, which is not materially different.

With this information, we find it interesting that HD Hyundai Heavy IndustriesLtd is trading at a high P/S compared to the industry. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for disappointment if the P/S falls to levels more in line with the growth outlook.

The Key Takeaway

HD Hyundai Heavy IndustriesLtd's P/S is on the rise since its shares have risen strongly. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Given HD Hyundai Heavy IndustriesLtd's future revenue forecasts are in line with the wider industry, the fact that it trades at an elevated P/S is somewhat surprising. 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.

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

If these risks are making you reconsider your opinion on HD Hyundai Heavy IndustriesLtd, 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.