Revenues Not Telling The Story For ADM Korea Inc. (KOSDAQ:187660) After Shares Rise 36%

ADM Korea Inc. (KOSDAQ:187660) shares have continued their recent momentum with a 36% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 76% in the last year.

After such a large jump in price, ADM Korea may be sending sell signals at present with a price-to-sales (or "P/S") ratio of 5.9x, when you consider almost half of the companies in the Life Sciences industry in Korea have P/S ratios under 4x and even P/S lower than 1.6x aren't out of the ordinary. 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.

See our latest analysis for ADM Korea

What Does ADM Korea's Recent Performance Look Like?

As an illustration, revenue has deteriorated at ADM Korea over the last year, which is not ideal at all. 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. If not, then existing shareholders may be quite nervous about the viability of the share price.

Although there are no analyst estimates available for ADM Korea, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

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

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

Retrospectively, the last year delivered a frustrating 7.3% decrease to the company's top line. Regardless, revenue has managed to lift by a handy 5.7% in aggregate from three years ago, thanks to the earlier period of growth. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of revenue growth.

This is in contrast to the rest of the industry, which is expected to grow by 20% 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 ADM Korea'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. 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 ADM Korea's P/S?

ADM Korea's P/S is on the rise since its shares have risen strongly. 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.

Our examination of ADM Korea 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 the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

There are also other vital risk factors to consider and we've discovered 4 warning signs for ADM Korea (2 are a bit unpleasant!) that you should be aware of before investing here.

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).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.