HD Hyundai Heavy Industries Co.,Ltd.'s (KRX:329180) 26% Price Boost Is Out Of Tune With Revenues

Despite an already strong run, HD Hyundai Heavy Industries Co.,Ltd. (KRX:329180) shares have been powering on, with a gain of 26% in the last thirty days. Taking a wider view, although not as strong as the last month, the full year gain of 17% is also fairly reasonable.

Although its price has surged higher, there still wouldn't be many who think HD Hyundai Heavy IndustriesLtd's price-to-sales (or "P/S") ratio of 1.2x is worth a mention when the median P/S in Korea's Machinery industry is similar at about 1x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

See our latest analysis for HD Hyundai Heavy IndustriesLtd

What Does HD Hyundai Heavy IndustriesLtd's P/S Mean For Shareholders?

HD Hyundai Heavy IndustriesLtd's revenue growth of late has been pretty similar to most other companies. Perhaps the market is expecting future revenue performance to show no drastic signs of changing, justifying the P/S being at current levels. If this is the case, then at least existing shareholders won't be losing sleep over the current share price.

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

What Are Revenue Growth Metrics Telling Us About The P/S?

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

If we review the last year of revenue growth, the company posted a terrific increase of 27%. The strong recent performance means it was also able to grow revenue by 52% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Turning to the outlook, the next year should generate growth of 12% as estimated by the analysts watching the company. That's shaping up to be materially lower than the 34% growth forecast for the broader industry.

In light of this, it's curious that HD Hyundai Heavy IndustriesLtd's P/S sits in line with the majority of other companies. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

The Final Word

HD Hyundai Heavy IndustriesLtd appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

When you consider that HD Hyundai Heavy IndustriesLtd's revenue growth estimates are fairly muted compared to the broader industry, it's easy to see why we consider it unexpected to be trading at its current P/S ratio. 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.

A lot of potential risks can sit within a company's balance sheet. Take a look at our free balance sheet analysis for HD Hyundai Heavy IndustriesLtd with six simple checks on some of these key factors.

If you're unsure about the strength of HD Hyundai Heavy IndustriesLtd'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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com