Ecoeye Co., Ltd.'s (KOSDAQ:448280) 42% Price Boost Is Out Of Tune With Revenues

The Ecoeye Co., Ltd. (KOSDAQ:448280) share price has done very well over the last month, posting an excellent gain of 42%. Unfortunately, despite the strong performance over the last month, the full year gain of 4.5% isn't as attractive.

Since its price has surged higher, you could be forgiven for thinking Ecoeye is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 11.1x, considering almost half the companies in Korea's Commercial Services industry have P/S ratios below 1x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

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View our latest analysis for Ecoeye

What Does Ecoeye's P/S Mean For Shareholders?

For example, consider that Ecoeye'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.

Although there are no analyst estimates available for Ecoeye, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For Ecoeye?

Ecoeye's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

Retrospectively, the last year delivered a frustrating 60% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 4.5% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Comparing that to the industry, which is predicted to deliver 9.5% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this information, we find it concerning that Ecoeye is trading at a P/S higher than the industry. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

The Final Word

Ecoeye's P/S has grown nicely over the last month thanks to a handy boost in the share price. 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.

We've established that Ecoeye currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. Should recent medium-term revenue trends persist, it would pose a significant risk to existing shareholders' investments and prospective investors will have a hard time accepting the current value of the stock.

Don't forget that there may be other risks. For instance, we've identified 5 warning signs for Ecoeye (3 make us uncomfortable) you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.