Why Investors Shouldn't Be Surprised By Lotte Tour Development Co., Ltd.'s (KRX:032350) 25% Share Price Surge

Lotte Tour Development Co., Ltd. (KRX:032350) shares have continued their recent momentum with a 25% gain in the last month alone. The annual gain comes to 161% following the latest surge, making investors sit up and take notice.

After such a large jump in price, you could be forgiven for thinking Lotte Tour Development is a stock not worth researching with a price-to-sales ratios (or "P/S") of 2.9x, considering almost half the companies in Korea's Hospitality industry have P/S ratios below 1.4x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality.

View our latest analysis for Lotte Tour Development

How Has Lotte Tour Development Performed Recently?

With revenue growth that's superior to most other companies of late, Lotte Tour Development has been doing relatively well. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Want the full picture on analyst estimates for the company? Then our free report on Lotte Tour Development will help you uncover what's on the horizon.

Do Revenue Forecasts Match The High P/S Ratio?

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

Retrospectively, the last year delivered an exceptional 27% gain to the company's top line. Pleasingly, revenue has also lifted 221% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Shifting to the future, estimates from the six analysts covering the company suggest revenue should grow by 24% over the next year. Meanwhile, the rest of the industry is forecast to only expand by 12%, which is noticeably less attractive.

In light of this, it's understandable that Lotte Tour Development's P/S sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What Does Lotte Tour Development's P/S Mean For Investors?

Lotte Tour Development'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.

As we suspected, our examination of Lotte Tour Development's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless these conditions change, they will continue to provide strong support to the share price.

It is also worth noting that we have found 1 warning sign for Lotte Tour Development that you need to take into consideration.

If you're unsure about the strength of Lotte Tour Development's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.