There's Reason For Concern Over FutureChem Co.,Ltd's (KOSDAQ:220100) Massive 33% Price Jump

FutureChem Co.,Ltd (KOSDAQ:220100) shareholders would be excited to see that the share price has had a great month, posting a 33% gain and recovering from prior weakness. The annual gain comes to 173% following the latest surge, making investors sit up and take notice.

Following the firm bounce in price, FutureChemLtd may be sending strong sell signals at present with a price-to-sales (or "P/S") ratio of 32.2x, when you consider almost half of the companies in the Life Sciences industry in Korea have P/S ratios under 3.5x and even P/S lower than 1.3x 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 so lofty.

Check out our latest analysis for FutureChemLtd

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

Revenue has risen firmly for FutureChemLtd recently, which is pleasing to see. 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.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on FutureChemLtd's earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For FutureChemLtd?

The only time you'd be truly comfortable seeing a P/S as steep as FutureChemLtd's is when the company's growth is on track to outshine the industry decidedly.

Taking a look back first, we see that the company grew revenue by an impressive 16% last year. Revenue has also lifted 22% in aggregate from three years ago, mostly thanks to the last 12 months of growth. Accordingly, shareholders would have probably been 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 22% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's alarming that FutureChemLtd's P/S sits above the majority of other companies. 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.

The Final Word

FutureChemLtd's P/S has grown nicely over the last month thanks to a handy boost in the share price. 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 FutureChemLtd 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 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. 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.

It is also worth noting that we have found 1 warning sign for FutureChemLtd that you need to take into consideration.

If these risks are making you reconsider your opinion on FutureChemLtd, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.