KM Corporation's (KOSDAQ:083550) price-to-sales (or "P/S") ratio of 0.3x might make it look like a buy right now compared to the Medical Equipment industry in Korea, where around half of the companies have P/S ratios above 2x and even P/S above 7x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.
Check out our latest analysis for KM
What Does KM's Recent Performance Look Like?
Revenue has risen at a steady rate over the last year for KM, which is generally not a bad outcome. It might be that many expect the respectable revenue performance to degrade, which has repressed the P/S. Those who are bullish on KM will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.
Although there are no analyst estimates available for KM, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.How Is KM's Revenue Growth Trending?
There's an inherent assumption that a company should underperform the industry for P/S ratios like KM's to be considered reasonable.
If we review the last year of revenue growth, the company posted a worthy increase of 4.4%. Still, lamentably revenue has fallen 13% in aggregate from three years ago, which is disappointing. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.
In contrast to the company, the rest of the industry is expected to grow by 46% over the next year, which really puts the company's recent medium-term revenue decline into perspective.
With this information, we are not surprised that KM is trading at a P/S lower than the industry. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.
What We Can Learn From KM'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.
As we suspected, our examination of KM revealed its shrinking revenue over the medium-term is contributing to its low P/S, given the industry is set to grow. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises either. Given the current circumstances, it seems unlikely that the share price will experience any significant movement in either direction in the near future if recent medium-term revenue trends persist.
There are also other vital risk factors to consider and we've discovered 2 warning signs for KM (1 shouldn't be ignored!) that you should be aware of before investing here.
It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).
Valuation is complex, but we're here to simplify it.
Discover if KM might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.
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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.