What Enchem Co., Ltd.'s (KOSDAQ:348370) 27% Share Price Gain Is Not Telling You

Explore Enchem's Fair Values from the Community and select yours

Enchem Co., Ltd. (KOSDAQ:348370) shareholders would be excited to see that the share price has had a great month, posting a 27% gain and recovering from prior weakness. Still, the 30-day jump doesn't change the fact that longer term shareholders have seen their stock decimated by the 54% share price drop in the last twelve months.

Since its price has surged higher, when almost half of the companies in Korea's Chemicals industry have price-to-sales ratios (or "P/S") below 0.7x, you may consider Enchem as a stock not worth researching with its 4.3x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

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See our latest analysis for Enchem

How Enchem Has Been Performing

We'd have to say that with no tangible growth over the last year, Enchem's revenue has been unimpressive. It might be that many are expecting an improvement to the uninspiring revenue performance over the coming period, which has kept the P/S from collapsing. 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 Enchem, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Enchem's Revenue Growth Trending?

In order to justify its P/S ratio, Enchem would need to produce outstanding growth that's well in excess of the industry.

If we review the last year of revenue, the company posted a result that saw barely any deviation from a year ago. Fortunately, a few good years before that means that it was still able to grow revenue by 27% in total over the last three years. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

It's interesting to note that the rest of the industry is similarly expected to grow by 9.3% over the next year, which is fairly even with the company's recent medium-term annualised growth rates.

In light of this, it's curious that Enchem's P/S sits above the majority of other companies. It seems most investors are ignoring the fairly average recent growth rates and are willing to pay up for exposure to the stock. Nevertheless, they may be setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

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

Enchem's P/S has grown nicely over the last month thanks to a handy boost in the share price. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our look into Enchem has shown that it currently trades on a higher than expected P/S since its recent three-year growth is only in line with the wider industry forecast. Right now we are uncomfortable with the high P/S as this revenue performance isn't likely to support such positive sentiment for long. If recent medium-term revenue trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Enchem (at least 2 which shouldn't be ignored), and understanding these should be part of your investment process.

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).

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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.