Some Confidence Is Lacking In K-Auction.Co.Ltd.'s (KOSDAQ:102370) P/S

When close to half the companies in the Consumer Services industry in Korea have price-to-sales ratios (or "P/S") below 0.8x, you may consider K-Auction.Co.Ltd. (KOSDAQ:102370) as a stock to avoid entirely with its 5.8x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

Check out our latest analysis for K-Auction.Co.Ltd

What Does K-Auction.Co.Ltd's P/S Mean For Shareholders?

Recent times have been quite advantageous for K-Auction.Co.Ltd as its revenue has been rising very briskly. It seems that many are expecting the strong revenue performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.

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

How Is K-Auction.Co.Ltd's Revenue Growth Trending?

In order to justify its P/S ratio, K-Auction.Co.Ltd would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered an exceptional 35% gain to the company's top line. However, this wasn't enough as the latest three year period has seen the company endure a nasty 50% drop in revenue in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

In contrast to the company, the rest of the industry is expected to grow by 4.4% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this information, we find it concerning that K-Auction.Co.Ltd 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. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

The Final Word

Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of K-Auction.Co.Ltd 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. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You should always think about risks. Case in point, we've spotted 4 warning signs for K-Auction.Co.Ltd you should be aware of, and 2 of them are potentially serious.

If you're unsure about the strength of K-Auction.Co.Ltd'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.