Sungchang Enterprise Holdings Limited's (KRX:000180) Shares Climb 33% But Its Business Is Yet to Catch Up

The Sungchang Enterprise Holdings Limited (KRX:000180) share price has done very well over the last month, posting an excellent gain of 33%. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 5.3% in the last twelve months.

After such a large jump in price, given close to half the companies operating in Korea's Forestry industry have price-to-sales ratios (or "P/S") below 0.2x, you may consider Sungchang Enterprise Holdings as a stock to potentially avoid with its 0.9x 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 as high as it is.

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Check out our latest analysis for Sungchang Enterprise Holdings

What Does Sungchang Enterprise Holdings' P/S Mean For Shareholders?

For instance, Sungchang Enterprise Holdings' receding revenue in recent times would have to be some food for thought. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. However, if this isn't the case, investors might get caught out paying too much for the stock.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Sungchang Enterprise Holdings will help you shine a light on its historical performance.

How Is Sungchang Enterprise Holdings' Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as high as Sungchang Enterprise Holdings' is when the company's growth is on track to outshine the industry.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 13%. This means it has also seen a slide in revenue over the longer-term as revenue is down 33% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 11% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this information, we find it concerning that Sungchang Enterprise Holdings is trading at a P/S higher than the industry. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

What We Can Learn From Sungchang Enterprise Holdings' P/S?

Sungchang Enterprise Holdings' P/S is on the rise since its shares have risen strongly. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

We've established that Sungchang Enterprise Holdings currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Sungchang Enterprise Holdings (1 can't be ignored) you should be aware of.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.