There's Reason For Concern Over Korea Petrochemical Ind. Co., Ltd.'s (KRX:006650) Price

It's not a stretch to say that Korea Petrochemical Ind. Co., Ltd.'s (KRX:006650) price-to-sales (or "P/S") ratio of 0.3x right now seems quite "middle-of-the-road" for companies in the Chemicals industry in Korea, where the median P/S ratio is around 0.8x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

See our latest analysis for Korea Petrochemical Ind

What Does Korea Petrochemical Ind's P/S Mean For Shareholders?

Recent times have been pleasing for Korea Petrochemical Ind as its revenue has risen in spite of the industry's average revenue going into reverse. Perhaps the market is expecting its current strong performance to taper off in accordance to the rest of the industry, which has kept the P/S contained. Those who are bullish on Korea Petrochemical Ind will be hoping that this isn't the case, so that they can pick up the stock at a slightly lower valuation.

Want the full picture on analyst estimates for the company? Then our free report on Korea Petrochemical Ind will help you uncover what's on the horizon.

What Are Revenue Growth Metrics Telling Us About The P/S?

In order to justify its P/S ratio, Korea Petrochemical Ind would need to produce growth that's similar to the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 28%. Pleasingly, revenue has also lifted 35% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Turning to the outlook, the next year should generate growth of 8.2% as estimated by the seven analysts watching the company. That's shaping up to be materially lower than the 29% growth forecast for the broader industry.

With this in mind, we find it intriguing that Korea Petrochemical Ind'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 Bottom Line On Korea Petrochemical Ind's P/S

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.

When you consider that Korea Petrochemical Ind's revenue growth estimates are fairly muted compared to the broader industry, it's easy to see why we consider it unexpected to be trading at its current P/S ratio. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. Circumstances like this present a risk to current and prospective investors who may see share prices fall if the low revenue growth impacts the sentiment.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for Korea Petrochemical Ind with six simple checks on some of these key factors.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com