Danal Co., Ltd. (KOSDAQ:064260) Stocks Shoot Up 31% But Its P/S Still Looks Reasonable

Danal Co., Ltd. (KOSDAQ:064260) shares have continued their recent momentum with a 31% gain in the last month alone. The last month tops off a massive increase of 203% in the last year.

Since its price has surged higher, given close to half the companies operating in Korea's Diversified Financial industry have price-to-sales ratios (or "P/S") below 1x, you may consider Danal as a stock to potentially avoid with its 2.8x P/S ratio. 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.

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See our latest analysis for Danal

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

For instance, Danal's receding revenue in recent times would have to be some food for thought. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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Do Revenue Forecasts Match The High P/S Ratio?

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

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 17%. As a result, revenue from three years ago have also fallen 20% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

This is in contrast to the rest of the industry, which is expected to decline by 47% over the next year, even worse than the company's recent medium-term annualised revenue decline.

With this in consideration, it's no surprise that Danal's P/S exceeds that of its industry peers. However, even if the company's recent growth rates were to continue outperforming the industry, shrinking revenues are unlikely to make the P/S premium sustainable over the longer term. There is potential for the P/S to fall to lower levels if the company doesn't improve its top-line growth, which would be difficult to do with the current industry outlook.

The Key Takeaway

Danal shares have taken a big step in a northerly direction, but its P/S is elevated as a result. 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.

As expected, our analysis of Danal confirms that the company's less severe contraction in revenue over the past three-year years is a major contributor to its higher than industry P/S, given the industry is set to decline even more. Right now shareholders are comfortable with the P/S as they are quite confident revenue aren't under any additional threat. We still remain cautious about the company's ability to stay its recent course and avoid revenues slipping in line with the industry. Although, if the company's relative outperformance doesn't change it will continue to provide strong support to the share price.

Plus, you should also learn about these 3 warning signs we've spotted with Danal.

If these risks are making you reconsider your opinion on Danal, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.