Risks Still Elevated At These Prices As Sam Chun Dang Pharm. Co., Ltd (KOSDAQ:000250) Shares Dive 26%

To the annoyance of some shareholders, Sam Chun Dang Pharm. Co., Ltd (KOSDAQ:000250) shares are down a considerable 26% in the last month, which continues a horrid run for the company. Looking at the bigger picture, even after this poor month the stock is up 34% in the last year.

Even after such a large drop in price, given around half the companies in Korea's Pharmaceuticals industry have price-to-sales ratios (or "P/S") below 0.8x, you may still consider Sam Chun Dang Pharm as a stock to avoid entirely with its 11.3x 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.

See our latest analysis for Sam Chun Dang Pharm

How Sam Chun Dang Pharm Has Been Performing

Sam Chun Dang Pharm has been doing a good job lately as it's been growing revenue at a solid pace. One possibility is that the P/S ratio is high because investors think this respectable revenue growth will be enough to outperform the broader industry in the near future. 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 Sam Chun Dang Pharm will help you shine a light on its historical performance.

Do Revenue Forecasts Match The High P/S Ratio?

Sam Chun Dang Pharm's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

Retrospectively, the last year delivered a decent 13% gain to the company's revenues. The latest three year period has also seen a 26% overall rise in revenue, aided somewhat by its short-term performance. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

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 in mind, we find it worrying that Sam Chun Dang Pharm's P/S exceeds that of its industry peers. 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.

The Bottom Line On Sam Chun Dang Pharm's P/S

Even after such a strong price drop, Sam Chun Dang Pharm's P/S still exceeds the industry median significantly. 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.

The fact that Sam Chun Dang Pharm 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 observe slower-than-industry revenue growth alongside a high P/S ratio, we assume there to be a significant risk of the share price decreasing, which would result in a lower P/S ratio. 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.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Sam Chun Dang Pharm (1 shouldn't be ignored!) that you need to be mindful of.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.