There's Reason For Concern Over Histeel Co.,Ltd.'s (KRX:071090) Massive 49% Price Jump

Histeel Co.,Ltd. (KRX:071090) shares have had a really impressive month, gaining 49% after a shaky period beforehand. The last 30 days bring the annual gain to a very sharp 60%.

Even after such a large jump in price, it's still not a stretch to say that HisteelLtd's price-to-sales (or "P/S") ratio of 0.5x right now seems quite "middle-of-the-road" compared to the Metals and Mining industry in Korea, where the median P/S ratio is around 0.3x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

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See our latest analysis for HisteelLtd

How Has HisteelLtd Performed Recently?

As an illustration, revenue has deteriorated at HisteelLtd over the last year, which is not ideal at all. It might be that many expect the company to put the disappointing revenue performance behind them over the coming period, which has kept the P/S from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on HisteelLtd will help you shine a light on its historical performance.

How Is HisteelLtd's Revenue Growth Trending?

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

Retrospectively, the last year delivered a frustrating 9.2% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 5.8% in aggregate. 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 2.7% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this in mind, we find it worrying that HisteelLtd's P/S exceeds that of its industry peers. 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 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 Key Takeaway

HisteelLtd appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry 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.

Our look at HisteelLtd revealed its shrinking revenues over the medium-term haven't impacted the P/S as much as we anticipated, given the industry is set to grow. When we see revenue heading backwards in the context of growing industry forecasts, it'd make sense to expect a possible share price decline on the horizon, sending the moderate P/S lower. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

Before you take the next step, you should know about the 3 warning signs for HisteelLtd (2 are significant!) 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.