Why Investors Shouldn't Be Surprised By Cellumed Co.,Ltd.'s (KOSDAQ:049180) 35% Share Price Plunge

Cellumed Co.,Ltd. (KOSDAQ:049180) shareholders that were waiting for something to happen have been dealt a blow with a 35% share price drop in the last month. For any long-term shareholders, the last month ends a year to forget by locking in a 67% share price decline.

Since its price has dipped substantially, CellumedLtd's price-to-sales (or "P/S") ratio of 0.2x might make it look like a strong buy right now compared to the wider Medical Equipment industry in Korea, where around half of the companies have P/S ratios above 2.5x and even P/S above 8x are quite common. However, the P/S might be quite low for a reason and it requires further investigation to determine if it's justified.

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See our latest analysis for CellumedLtd

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

With revenue growth that's exceedingly strong of late, CellumedLtd has been doing very well. One possibility is that the P/S ratio is low because investors think this strong revenue growth might actually underperform the broader industry in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

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 CellumedLtd's earnings, revenue and cash flow.

Do Revenue Forecasts Match The Low P/S Ratio?

In order to justify its P/S ratio, CellumedLtd would need to produce anemic growth that's substantially trailing the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 39%. The latest three year period has also seen a 29% overall rise in revenue, aided extensively by its short-term performance. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 37% shows it's noticeably less attractive.

In light of this, it's understandable that CellumedLtd's P/S sits below the majority of other companies. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

The Bottom Line On CellumedLtd's P/S

Having almost fallen off a cliff, CellumedLtd's share price has pulled its P/S way down as well. 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.

As we suspected, our examination of CellumedLtd revealed its three-year revenue trends are contributing to its low P/S, given they look worse than current industry expectations. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. If recent medium-term revenue trends continue, it's hard to see the share price experience a reversal of fortunes anytime soon.

And what about other risks? Every company has them, and we've spotted 4 warning signs for CellumedLtd (of which 2 shouldn't be ignored!) you should know about.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.