Kook Soon Dang.Co.,Ltd.'s (KOSDAQ:043650) 31% Price Boost Is Out Of Tune With Revenues

Kook Soon Dang.Co.,Ltd. (KOSDAQ:043650) shares have had a really impressive month, gaining 31% after a shaky period beforehand. Looking further back, the 10% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

Following the firm bounce in price, given close to half the companies operating in Korea's Beverage industry have price-to-sales ratios (or "P/S") below 1x, you may consider Kook Soon Dang.Co.Ltd as a stock to potentially avoid with its 1.6x 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.

See our latest analysis for Kook Soon Dang.Co.Ltd

What Does Kook Soon Dang.Co.Ltd's P/S Mean For Shareholders?

For example, consider that Kook Soon Dang.Co.Ltd'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. If not, then existing shareholders may be quite nervous about the viability of the share price.

Although there are no analyst estimates available for Kook Soon Dang.Co.Ltd, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

What Are Revenue Growth Metrics Telling Us About The High P/S?

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

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 3.5%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 25% overall rise in revenue. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of revenue growth.

This is in contrast to the rest of the industry, which is expected to grow by 15% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's alarming that Kook Soon Dang.Co.Ltd's P/S sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Bottom Line On Kook Soon Dang.Co.Ltd's P/S

Kook Soon Dang.Co.Ltd shares have taken a big step in a northerly direction, but its P/S is elevated as a result. 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.

Our examination of Kook Soon Dang.Co.Ltd revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. When we see slower than industry revenue growth but an elevated P/S, there's considerable risk of the share price declining, sending the P/S lower. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Don't forget that there may be other risks. For instance, we've identified 5 warning signs for Kook Soon Dang.Co.Ltd (1 is a bit unpleasant) you should be aware of.

If these risks are making you reconsider your opinion on Kook Soon Dang.Co.Ltd, 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.