Optimistic Investors Push KOYJ Co., Ltd. (KOSDAQ:121850) Shares Up 64% But Growth Is Lacking

Despite an already strong run, KOYJ Co., Ltd. (KOSDAQ:121850) shares have been powering on, with a gain of 64% in the last thirty days. Notwithstanding the latest gain, the annual share price return of 4.2% isn't as impressive.

Following the firm bounce in price, you could be forgiven for thinking KOYJ is a stock not worth researching with a price-to-sales ratios (or "P/S") of 2.4x, considering almost half the companies in Korea's Chemicals industry have P/S ratios below 0.6x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

Check out our latest analysis for KOYJ

What Does KOYJ's Recent Performance Look Like?

The revenue growth achieved at KOYJ over the last year would be more than acceptable for most companies. It might be that many expect the respectable revenue performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders may be a little nervous about the viability of the share price.

Although there are no analyst estimates available for KOYJ, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is KOYJ's Revenue Growth Trending?

KOYJ's P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

Taking a look back first, we see that the company grew revenue by an impressive 19% last year. However, this wasn't enough as the latest three year period has seen the company endure a nasty 12% drop in revenue in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

In contrast to the company, the rest of the industry is expected to grow by 11% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this in mind, we find it worrying that KOYJ's P/S exceeds that of its industry peers. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

What We Can Learn From KOYJ's P/S?

KOYJ shares have taken a big step in a northerly direction, but its P/S is elevated as a result. 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 KOYJ currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

And what about other risks? Every company has them, and we've spotted 3 warning signs for KOYJ (of which 2 are a bit unpleasant!) you should know about.

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