Kakao Pay Corp.'s (KRX:377300) Price In Tune With Revenues

When you see that almost half of the companies in the Diversified Financial industry in Korea have price-to-sales ratios (or "P/S") below 1.1x, Kakao Pay Corp. (KRX:377300) looks to be giving off strong sell signals with its 7.2x 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.

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View our latest analysis for Kakao Pay

How Has Kakao Pay Performed Recently?

Recent times have been advantageous for Kakao Pay as its revenues have been rising faster than most other companies. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. However, if this isn't the case, investors might get caught out paying too much for the stock.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Kakao Pay.

Do Revenue Forecasts Match The High P/S Ratio?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Kakao Pay's to be considered reasonable.

If we review the last year of revenue growth, the company posted a terrific increase of 27%. The strong recent performance means it was also able to grow revenue by 72% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Shifting to the future, estimates from the analysts covering the company suggest revenue should grow by 13% per annum over the next three years. Meanwhile, the rest of the industry is forecast to only expand by 10.0% each year, which is noticeably less attractive.

With this in mind, it's not hard to understand why Kakao Pay's P/S is high relative to its industry peers. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Key Takeaway

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.

We've established that Kakao Pay maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Diversified Financial industry, as expected. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for Kakao Pay with six simple checks on some of these key factors.

If these risks are making you reconsider your opinion on Kakao Pay, 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.