There's Reason For Concern Over KPM TECH Co., Ltd.'s (KOSDAQ:042040) Massive 38% Price Jump

KPM TECH Co., Ltd. (KOSDAQ:042040) shares have continued their recent momentum with a 38% gain in the last month alone. Notwithstanding the latest gain, the annual share price return of 8.7% isn't as impressive.

After such a large jump in price, you could be forgiven for thinking KPM TECH is a stock not worth researching with a price-to-sales ratios (or "P/S") of 1.9x, considering almost half the companies in Korea's Chemicals industry have P/S ratios below 0.7x. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

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Check out our latest analysis for KPM TECH

What Does KPM TECH's Recent Performance Look Like?

For example, consider that KPM TECH's financial performance has been poor lately as its revenue has been in decline. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Although there are no analyst estimates available for KPM TECH, 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?

There's an inherent assumption that a company should outperform the industry for P/S ratios like KPM TECH's to be considered reasonable.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 15%. That put a dampener on the good run it was having over the longer-term as its three-year revenue growth is still a noteworthy 5.4% in total. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 9.3% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

With this in mind, we find it worrying that KPM TECH's P/S exceeds that of its industry peers. 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 Final Word

The large bounce in KPM TECH's shares has lifted the company's P/S handsomely. 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.

The fact that KPM TECH currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. Right now we aren't comfortable with the high P/S as this revenue performance isn't likely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for KPM TECH that you should be aware of.

If you're unsure about the strength of KPM TECH'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.