SK Innovation Co., Ltd. (KRX:096770) Screens Well But There Might Be A Catch

There wouldn't be many who think SK Innovation Co., Ltd.'s (KRX:096770) price-to-sales (or "P/S") ratio of 0.1x is worth a mention when the median P/S for the Oil and Gas industry in Korea is similar at about 0.3x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

See our latest analysis for SK Innovation

How Has SK Innovation Performed Recently?

Recent times have been advantageous for SK Innovation as its revenues have been rising faster than most other companies. It might be that many expect the strong revenue performance to wane, which has kept the P/S ratio from rising. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

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

Is There Some Revenue Growth Forecasted For SK Innovation?

In order to justify its P/S ratio, SK Innovation would need to produce growth that's similar to the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 5.9% last year. Pleasingly, revenue has also lifted 104% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Turning to the outlook, the next three years should demonstrate some strength in company's business, generating growth of 2.0% per annum as estimated by the analysts watching the company. While this isn't a particularly impressive figure, it should be noted that the the industry is expected to decline by 1.6% each year.

Even though the growth is only slight, it's peculiar that SK Innovation's P/S sits in line with the majority of other companies given the industry is set for a decline. Apparently some shareholders are skeptical of the contrarian forecasts and have been accepting lower selling prices.

What We Can Learn From SK Innovation's P/S?

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 SK Innovation's analyst forecasts revealed that its superior revenue outlook against a shaky industry isn't resulting in the company trading at a higher P/S, as per our expectations. Given the glowing revenue forecasts, we can only assume potential risks are what might be capping the P/S ratio at its current levels. One such risk is that the company may not live up to analysts' revenue trajectories in tough industry conditions. It appears some are indeed anticipating revenue instability, because the company's current prospects should normally provide a boost to the share price.

Having said that, be aware SK Innovation is showing 2 warning signs in our investment analysis, you should know about.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.