Paseco Co. Ltd's (KOSDAQ:037070) 37% Price Boost Is Out Of Tune With Revenues

Paseco Co. Ltd (KOSDAQ:037070) shares have continued their recent momentum with a 37% gain in the last month alone. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 9.0% in the last twelve months.

After such a large jump in price, you could be forgiven for thinking Paseco is a stock not worth researching with a price-to-sales ratios (or "P/S") of 1.1x, considering almost half the companies in Korea's Consumer Durables industry have P/S ratios below 0.4x. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

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Check out our latest analysis for Paseco

How Has Paseco Performed Recently?

Paseco has been doing a decent job lately as it's been growing revenue at a reasonable pace. One possibility is that the P/S ratio is high because investors think this good revenue growth will be enough to outperform the broader industry in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Paseco will help you shine a light on its historical performance.

Do Revenue Forecasts Match The High P/S Ratio?

In order to justify its P/S ratio, Paseco would need to produce impressive growth in excess of the industry.

Retrospectively, the last year delivered a decent 3.9% gain to the company's revenues. However, this wasn't enough as the latest three year period has seen an unpleasant 29% overall drop in revenue. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 4.9% shows it's an unpleasant look.

In light of this, it's alarming that Paseco's P/S sits above the majority of other companies. 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 Bottom Line On Paseco's P/S

Paseco's P/S is on the rise since its shares have risen strongly. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Paseco revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Paseco you should know about.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.