Sajo Industries Company Limited's (KRX:007160) 35% Share Price Surge Not Quite Adding Up

The Sajo Industries Company Limited (KRX:007160) share price has done very well over the last month, posting an excellent gain of 35%. Taking a wider view, although not as strong as the last month, the full year gain of 23% is also fairly reasonable.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about Sajo Industries' P/S ratio of 0.4x, since the median price-to-sales (or "P/S") ratio for the Food industry in Korea is also close to 0.3x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

We've discovered 3 warning signs about Sajo Industries. View them for free.

View our latest analysis for Sajo Industries

What Does Sajo Industries' Recent Performance Look Like?

For example, consider that Sajo Industries' financial performance has been pretty ordinary lately as revenue growth is non-existent. One possibility is that the P/S is moderate because investors think this benign revenue growth rate might not be enough to outperform the broader industry in the near future. If not, then existing shareholders may be feeling hopeful about the future direction of the share price.

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 Sajo Industries' earnings, revenue and cash flow.

Is There Some Revenue Growth Forecasted For Sajo Industries?

Sajo Industries' P/S ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the industry.

Taking a look back first, we see that there was hardly any revenue growth to speak of for the company over the past year. Fortunately, a few good years before that means that it was still able to grow revenue by 7.6% in total over the last three years. So it appears to us that the company has had a mixed result in terms of growing revenue over that time.

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 curious that Sajo Industries' P/S sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. They may be setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Final Word

Sajo Industries appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Sajo Industries' average P/S is a bit surprising since its recent three-year growth is lower than the wider industry forecast. Right now we are uncomfortable with the P/S as this revenue performance isn't likely to support a more positive sentiment for long. Unless the recent medium-term conditions improve, it's hard to accept the current share price as fair value.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Sajo Industries (1 is potentially serious!) that you need to be mindful of.

If these risks are making you reconsider your opinion on Sajo Industries, 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.