NS ENM Co.,Ltd.'s (KOSDAQ:078860) 26% Price Boost Is Out Of Tune With Revenues

Despite an already strong run, NS ENM Co.,Ltd. (KOSDAQ:078860) shares have been powering on, with a gain of 26% in the last thirty days. The annual gain comes to 139% following the latest surge, making investors sit up and take notice.

After such a large jump in price, given around half the companies in Korea's Entertainment industry have price-to-sales ratios (or "P/S") below 1.5x, you may consider NS ENMLtd as a stock to avoid entirely with its 4.9x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for NS ENMLtd

What Does NS ENMLtd's Recent Performance Look Like?

For example, consider that NS ENMLtd's financial performance has been poor lately as its revenue has been in decline. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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 NS ENMLtd's earnings, revenue and cash flow.

How Is NS ENMLtd's Revenue Growth Trending?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like NS ENMLtd's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 11% decrease to the company's top line. Unfortunately, that's brought it right back to where it started three years ago with revenue growth being virtually non-existent overall during that time. Therefore, it's fair to say that revenue growth has been inconsistent recently for the company.

This is in contrast to the rest of the industry, which is expected to grow by 17% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it concerning that NS ENMLtd is trading at a P/S higher than the industry. It seems most investors are ignoring the fairly limited recent growth rates 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 recent growth rates.

What We Can Learn From NS ENMLtd's P/S?

The strong share price surge has lead to NS ENMLtd's P/S soaring as well. 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.

Our examination of NS ENMLtd revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. When we see slower than industry revenue growth but an elevated P/S, there's considerable risk of the share price declining, sending the P/S lower. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You should always think about risks. Case in point, we've spotted 4 warning signs for NS ENMLtd you should be aware of, and 2 of them make us uncomfortable.

If you're unsure about the strength of NS ENMLtd'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.