Wemade Co.,Ltd.'s (KOSDAQ:112040) 28% Share Price Surge Not Quite Adding Up

Wemade Co.,Ltd. (KOSDAQ:112040) shares have had a really impressive month, gaining 28% after a shaky period beforehand. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 21% over that time.

Although its price has surged higher, you could still be forgiven for feeling indifferent about WemadeLtd's P/S ratio of 1.5x, since the median price-to-sales (or "P/S") ratio for the Entertainment industry in Korea is also close to 1.8x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

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Check out our latest analysis for WemadeLtd

How WemadeLtd Has Been Performing

WemadeLtd could be doing better as it's been growing revenue less than most other companies lately. It might be that many expect the uninspiring revenue performance to strengthen positively, which has kept the P/S ratio from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.

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

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

The only time you'd be comfortable seeing a P/S like WemadeLtd's is when the company's growth is tracking the industry closely.

If we review the last year of revenue growth, the company posted a worthy increase of 2.9%. Pleasingly, revenue has also lifted 78% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Shifting to the future, estimates from the four analysts covering the company suggest revenue growth is heading into negative territory, declining 2.1% over the next year. Meanwhile, the broader industry is forecast to expand by 17%, which paints a poor picture.

With this information, we find it concerning that WemadeLtd is trading at a fairly similar P/S compared to the industry. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock right now. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the negative growth outlook.

The Final Word

WemadeLtd's stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. 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 check of WemadeLtd's analyst forecasts revealed that its outlook for shrinking revenue isn't bringing down its P/S as much as we would have predicted. With this in mind, we don't feel the current P/S is justified as declining revenues are unlikely to support a more positive sentiment for long. If the poor revenue outlook tells us one thing, it's that these current price levels could be unsustainable.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with WemadeLtd, and understanding these should be part of your investment process.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.