Wantedlab, Inc.'s (KOSDAQ:376980) Shares Climb 63% But Its Business Is Yet to Catch Up

Wantedlab, Inc. (KOSDAQ:376980) shares have had a really impressive month, gaining 63% after a shaky period beforehand. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 37% over that time.

Since its price has surged higher, you could be forgiven for thinking Wantedlab is a stock not worth researching with a price-to-sales ratios (or "P/S") of 1.6x, considering almost half the companies in Korea's Professional Services industry have P/S ratios below 0.7x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

Check out our latest analysis for Wantedlab

How Wantedlab Has Been Performing

For example, consider that Wantedlab's financial performance has been poor lately as its revenue has been in decline. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.

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 Wantedlab's earnings, revenue and cash flow.

Do Revenue Forecasts Match The High P/S Ratio?

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

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 11%. However, a few very strong years before that means that it was still able to grow revenue by an impressive 39% in total over the last three years. 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.

Weighing that recent medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 10% shows it's about the same on an annualised basis.

With this information, we find it interesting that Wantedlab is trading at a high P/S compared to the industry. Apparently many investors in the company are more bullish than recent times would indicate and aren't willing to let go of their stock right now. Nevertheless, they may be setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

What Does Wantedlab's P/S Mean For Investors?

Wantedlab'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.

Our look into Wantedlab has shown that it currently trades on a higher than expected P/S since its recent three-year growth is only in line with the wider industry forecast. When we see average revenue with industry-like growth combined with a high P/S, we suspect the share price is at risk of declining, bringing the P/S back in line with the industry too. If recent medium-term revenue trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 5 warning signs with Wantedlab, and understanding these should be part of your investment process.

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