There's No Escaping Lotte Chemical Corporation's (KRX:011170) Muted Revenues Despite A 28% Share Price Rise

Despite an already strong run, Lotte Chemical Corporation (KRX:011170) shares have been powering on, with a gain of 28% in the last thirty days. Taking a wider view, although not as strong as the last month, the full year gain of 12% is also fairly reasonable.

Even after such a large jump in price, when close to half the companies operating in Korea's Chemicals industry have price-to-sales ratios (or "P/S") above 0.7x, you may still consider Lotte Chemical as an enticing stock to check out with its 0.2x 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 limited.

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See our latest analysis for Lotte Chemical

What Does Lotte Chemical's Recent Performance Look Like?

While the industry has experienced revenue growth lately, Lotte Chemical's revenue has gone into reverse gear, which is not great. The P/S ratio is probably low because investors think this poor revenue performance isn't going to get any better. If you still like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

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

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

Lotte Chemical's P/S ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than 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 2.3%. This means it has also seen a slide in revenue over the longer-term as revenue is down 4.8% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Turning to the outlook, the next year should bring diminished returns, with revenue decreasing 0.6% as estimated by the analysts watching the company. Meanwhile, the broader industry is forecast to expand by 12%, which paints a poor picture.

With this in consideration, we find it intriguing that Lotte Chemical's P/S is closely matching its industry peers. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

The Final Word

The latest share price surge wasn't enough to lift Lotte Chemical's P/S close to the industry median. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

It's clear to see that Lotte Chemical maintains its low P/S on the weakness of its forecast for sliding revenue, as expected. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Lotte Chemical you should know about.

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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.