Revenues Not Telling The Story For Youlchon Chemical Co.,Ltd. (KRX:008730) After Shares Rise 25%

The Youlchon Chemical Co.,Ltd. (KRX:008730) share price has done very well over the last month, posting an excellent gain of 25%. Taking a wider view, although not as strong as the last month, the full year gain of 19% is also fairly reasonable.

Since its price has surged higher, you could be forgiven for thinking Youlchon ChemicalLtd is a stock not worth researching with a price-to-sales ratios (or "P/S") of 1.9x, considering almost half the companies in Korea's Packaging industry have P/S ratios below 0.4x. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

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Check out our latest analysis for Youlchon ChemicalLtd

How Has Youlchon ChemicalLtd Performed Recently?

Youlchon ChemicalLtd has been doing a good job lately as it's been growing revenue at a solid pace. Perhaps the market is expecting this decent revenue performance to beat out the industry over the near term, which has kept the P/S propped up. If not, then existing shareholders may be a little nervous about the viability of the share price.

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 Youlchon ChemicalLtd's earnings, revenue and cash flow.

How Is Youlchon ChemicalLtd's Revenue Growth Trending?

In order to justify its P/S ratio, Youlchon ChemicalLtd would need to produce impressive growth in excess of the industry.

Retrospectively, the last year delivered a decent 12% gain to the company's revenues. However, this wasn't enough as the latest three year period has seen an unpleasant 12% overall drop in revenue. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

In contrast to the company, the rest of the industry is expected to grow by 26% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this information, we find it concerning that Youlchon ChemicalLtd 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.

The Bottom Line On Youlchon ChemicalLtd's P/S

The large bounce in Youlchon ChemicalLtd's shares has lifted the company's P/S handsomely. 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 examination of Youlchon ChemicalLtd revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. Should recent medium-term revenue trends persist, it would pose a significant risk to existing shareholders' investments and prospective investors will have a hard time accepting the current value of the stock.

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

If you're unsure about the strength of Youlchon ChemicalLtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.