Dongwha Enterprise Co.,Ltd (KOSDAQ:025900) Stock Rockets 35% As Investors Are Less Pessimistic Than Expected

Dongwha Enterprise Co.,Ltd (KOSDAQ:025900) shares have had a really impressive month, gaining 35% after a shaky period beforehand. But the last month did very little to improve the 61% share price decline over the last year.

In spite of the firm bounce in price, it's still not a stretch to say that Dongwha EnterpriseLtd's price-to-sales (or "P/S") ratio of 0.5x right now seems quite "middle-of-the-road" compared to the Forestry industry in Korea, where the median P/S ratio is around 0.2x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

Check out our latest analysis for Dongwha EnterpriseLtd

How Has Dongwha EnterpriseLtd Performed Recently?

Dongwha EnterpriseLtd has been struggling lately as its revenue has declined faster than most other companies. Perhaps the market is expecting future revenue performance to begin matching the rest of the industry, which has kept the P/S from declining. You'd much rather the company improve its revenue if you still believe in the business. If not, then existing shareholders may be a little nervous about the viability of the share price.

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

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

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

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 5.4%. Regardless, revenue has managed to lift by a handy 8.5% in aggregate from three years ago, thanks to the earlier period of growth. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of revenue growth.

Shifting to the future, estimates from the only analyst covering the company suggest revenue should grow by 2.6% over the next year. With the industry predicted to deliver 12% growth, the company is positioned for a weaker revenue result.

With this information, we find it interesting that Dongwha EnterpriseLtd is trading at a fairly similar P/S compared to the industry. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Bottom Line On Dongwha EnterpriseLtd's P/S

Dongwha EnterpriseLtd's stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Our look at the analysts forecasts of Dongwha EnterpriseLtd's revenue prospects has shown that its inferior revenue outlook isn't negatively impacting its P/S as much as we would have predicted. At present, we aren't confident in the P/S as the predicted future revenues aren't likely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Dongwha EnterpriseLtd that you need to be mindful of.

If you're unsure about the strength of Dongwha EnterpriseLtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.