The Price Is Right For Danal Co., Ltd. (KOSDAQ:064260) Even After Diving 34%

Danal Co., Ltd. (KOSDAQ:064260) shareholders won't be pleased to see that the share price has had a very rough month, dropping 34% and undoing the prior period's positive performance. Of course, over the longer-term many would still wish they owned shares as the stock's price has soared 113% in the last twelve months.

Even after such a large drop in price, given close to half the companies operating in Korea's Diversified Financial industry have price-to-sales ratios (or "P/S") below 0.8x, you may still consider Danal as a stock to potentially avoid with its 1.9x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

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View our latest analysis for Danal

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

For example, consider that Danal's financial performance has been poor lately as its revenue has been in decline. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. However, if this isn't the case, investors might get caught out paying too much for the stock.

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 Danal's earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For Danal?

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

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 17%. This means it has also seen a slide in revenue over the longer-term as revenue is down 20% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

This is in contrast to the rest of the industry, which is expected to decline by 48% 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. Maintaining these prices will be difficult to achieve as a continuation of recent revenue trends is likely to weigh down the shares eventually.

The Bottom Line On Danal's P/S

There's still some elevation in Danal's P/S, even if the same can't be said for its share price recently. 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.

As we suspected, our examination of Danal revealed its narrower three-year contraction in revenue is contributing to its higher than industry P/S, given the industry is set to shrink 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.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Danal (at least 2 which are concerning), and understanding them should be part of your investment process.

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.