RaemongRaein Co., Ltd.'s (KOSDAQ:200350) Shares Climb 52% But Its Business Is Yet to Catch Up

RaemongRaein Co., Ltd. (KOSDAQ:200350) shares have had a really impressive month, gaining 52% 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.

Since its price has surged higher, you could be forgiven for thinking RaemongRaein is a stock not worth researching with a price-to-sales ratios (or "P/S") of 2.2x, considering almost half the companies in Korea's Entertainment industry have P/S ratios below 1.7x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

Check out our latest analysis for RaemongRaein

How RaemongRaein Has Been Performing

For instance, RaemongRaein's receding revenue in recent times would have to be some food for thought. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

Is There Enough Revenue Growth Forecasted For RaemongRaein?

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

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 14%. Even so, admirably revenue has lifted 30% in aggregate from three years ago, notwithstanding the last 12 months. So we can start by confirming that the company has generally done a very good job of growing revenue over that time, even though it had some hiccups along the way.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 13% shows it's noticeably less attractive.

In light of this, it's alarming that RaemongRaein's P/S sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

What We Can Learn From RaemongRaein's P/S?

RaemongRaein's P/S is on the rise since its shares have risen strongly. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

The fact that RaemongRaein currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. 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 need to take note of risks, for example - RaemongRaein has 4 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

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.