Risks Still Elevated At These Prices As Ananti Inc. (KOSDAQ:025980) Shares Dive 25%

To the annoyance of some shareholders, Ananti Inc. (KOSDAQ:025980) shares are down a considerable 25% in the last month, which continues a horrid run for the company. Still, a bad month hasn't completely ruined the past year with the stock gaining 33%, which is great even in a bull market.

Even after such a large drop in price, when almost half of the companies in Korea's Hospitality industry have price-to-sales ratios (or "P/S") below 1.6x, you may still consider Ananti 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.

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Check out our latest analysis for Ananti

What Does Ananti's Recent Performance Look Like?

For example, consider that Ananti'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 Ananti's earnings, revenue and cash flow.

How Is Ananti's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as high as Ananti's is when the company's growth is on track to outshine the industry.

Retrospectively, the last year delivered a frustrating 43% decrease to the company's top line. This has soured the latest three-year period, which nevertheless managed to deliver a decent 10% overall rise in revenue. So we can start by confirming that the company has generally done a good job of growing revenue over that time, even though it had some hiccups along the way.

Comparing that to the industry, which is predicted to deliver 9.7% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

With this information, we find it concerning that Ananti is trading at a P/S higher than the industry. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

What We Can Learn From Ananti's P/S?

Ananti's P/S remain high even after its stock plunged. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

The fact that Ananti currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. Right now we aren't comfortable with the high P/S as this revenue performance isn't likely to support such positive sentiment for long. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Ananti (at least 1 which is concerning), and understanding them should be part of your investment process.

If you're unsure about the strength of Ananti'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.