LOTTE Fine Chemical Co., Ltd.'s (KRX:004000) Popularity With Investors Is Under Threat From Overpricing

There wouldn't be many who think LOTTE Fine Chemical Co., Ltd.'s (KRX:004000) price-to-sales (or "P/S") ratio of 0.7x is worth a mention when the median P/S for the Chemicals industry in Korea is very similar. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

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View our latest analysis for LOTTE Fine Chemical

What Does LOTTE Fine Chemical's Recent Performance Look Like?

LOTTE Fine Chemical's revenue growth of late has been pretty similar to most other companies. Perhaps the market is expecting future revenue performance to show no drastic signs of changing, justifying the P/S being at current levels. If this is the case, then at least existing shareholders won't be losing sleep over the current share price.

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

How Is LOTTE Fine Chemical's Revenue Growth Trending?

There's an inherent assumption that a company should be matching the industry for P/S ratios like LOTTE Fine Chemical's to be considered reasonable.

Taking a look back first, we see that the company managed to grow revenues by a handy 5.2% last year. Still, lamentably revenue has fallen 27% in aggregate from three years ago, which is disappointing. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Shifting to the future, estimates from the eight analysts covering the company suggest revenue should grow by 7.1% over the next year. With the industry predicted to deliver 11% growth, the company is positioned for a weaker revenue result.

With this in mind, we find it intriguing that LOTTE Fine Chemical's P/S is closely matching its industry peers. 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 Final Word

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.

Given that LOTTE Fine Chemical's revenue growth projections are relatively subdued in comparison to the wider industry, it comes as a surprise to see it trading at its current P/S ratio. 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.

You should always think about risks. Case in point, we've spotted 1 warning sign for LOTTE Fine Chemical 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.