Investors Don't See Light At End Of Kangstem Biotech Co., Ltd.'s (KOSDAQ:217730) Tunnel

With a price-to-sales (or "P/S") ratio of 6.9x Kangstem Biotech Co., Ltd. (KOSDAQ:217730) may be sending bullish signals at the moment, given that almost half of all the Biotechs companies in Korea have P/S ratios greater than 10.4x and even P/S higher than 37x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

View our latest analysis for Kangstem Biotech

How Kangstem Biotech Has Been Performing

As an illustration, revenue has deteriorated at Kangstem Biotech over the last year, which is not ideal at all. One possibility is that the P/S is low because investors think the company won't do enough to avoid underperforming the broader industry in the near future. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

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

How Is Kangstem Biotech's Revenue Growth Trending?

In order to justify its P/S ratio, Kangstem Biotech would need to produce sluggish growth that's trailing the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 4.1%. However, a few very strong years before that means that it was still able to grow revenue by an impressive 72% in total over the last three years. 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.

This is in contrast to the rest of the industry, which is expected to grow by 40% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we can see why Kangstem Biotech is trading at a P/S lower than the industry. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

The Final Word

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.

As we suspected, our examination of Kangstem Biotech revealed its three-year revenue trends are contributing to its low P/S, given they look worse than current industry expectations. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. If recent medium-term revenue trends continue, it's hard to see the share price experience a reversal of fortunes anytime soon.

Having said that, be aware Kangstem Biotech is showing 3 warning signs in our investment analysis, and 1 of those is concerning.

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.