Cosmo Chemical Co., Ltd. (KRX:005420) May Have Run Too Fast Too Soon With Recent 25% Price Plummet

Cosmo Chemical Co., Ltd. (KRX:005420) shares have had a horrible month, losing 25% after a relatively good period beforehand. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 52% loss during that time.

Even after such a large drop in price, there still wouldn't be many who think Cosmo Chemical's price-to-sales (or "P/S") ratio of 0.9x is worth a mention when the median P/S in Korea's Chemicals industry is similar at about 0.6x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

View our latest analysis for Cosmo Chemical

How Cosmo Chemical Has Been Performing

For example, consider that Cosmo Chemical's financial performance has been poor lately as its revenue has been in decline. One possibility is that the P/S is moderate because investors think the company might still do enough to be in line with the broader industry in the near future. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Cosmo Chemical's earnings, revenue and cash flow.

Is There Some Revenue Growth Forecasted For Cosmo Chemical?

Cosmo Chemical's P/S ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with 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 16%. However, a few very strong years before that means that it was still able to grow revenue by an impressive 56% in total over the last three years. So we can start by confirming that the company has generally done a very good job of growing revenue over that time, even though it had some hiccups along the way.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 23% shows it's noticeably less attractive.

With this in mind, we find it intriguing that Cosmo Chemical's P/S is comparable to that of its industry peers. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. They may be setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Key Takeaway

With its share price dropping off a cliff, the P/S for Cosmo Chemical looks to be in line with the rest of the Chemicals industry. 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.

We've established that Cosmo Chemical's average P/S is a bit surprising since its recent three-year growth is lower than the wider industry forecast. Right now we are uncomfortable with the P/S as this revenue performance isn't likely to support a more positive sentiment for long. If recent medium-term revenue trends continue, the probability of a share price decline will become quite substantial, placing shareholders at risk.

Before you take the next step, you should know about the 2 warning signs for Cosmo Chemical (1 is a bit concerning!) that we have uncovered.

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.