NIBEC Co., Ltd. (KOSDAQ:138610) Stock Rockets 41% As Investors Are Less Pessimistic Than Expected

Despite an already strong run, NIBEC Co., Ltd. (KOSDAQ:138610) shares have been powering on, with a gain of 41% in the last thirty days. The last 30 days bring the annual gain to a very sharp 77%.

Since its price has surged higher, NIBEC may be sending sell signals at present with a price-to-sales (or "P/S") ratio of 13.5x, when you consider almost half of the companies in the Biotechs industry in Korea have P/S ratios under 10.4x and even P/S lower than 3x aren't out of the ordinary. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

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See our latest analysis for NIBEC

What Does NIBEC's P/S Mean For Shareholders?

NIBEC certainly has been doing a great job lately as it's been growing its revenue at a really rapid pace. Perhaps the market is expecting future revenue performance to outperform the wider market, which has seemingly got people interested in the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

How Is NIBEC's Revenue Growth Trending?

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

If we review the last year of revenue growth, the company posted a terrific increase of 35%. The latest three year period has also seen a 27% overall rise in revenue, aided extensively 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 60% 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 NIBEC'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.

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

NIBEC shares have taken a big step in a northerly direction, but its P/S is elevated as a result. 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 NIBEC 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. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

Before you take the next step, you should know about the 2 warning signs for NIBEC that we have uncovered.

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.