Bukwang Pharmaceutical Co., Ltd.'s (KRX:003000) Popularity With Investors Is Under Threat From Overpricing

When close to half the companies in the Pharmaceuticals industry in Korea have price-to-sales ratios (or "P/S") below 0.8x, you may consider Bukwang Pharmaceutical Co., Ltd. (KRX:003000) as a stock to potentially avoid with its 2.5x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

See our latest analysis for Bukwang Pharmaceutical

How Has Bukwang Pharmaceutical Performed Recently?

As an illustration, revenue has deteriorated at Bukwang Pharmaceutical over the last year, which is not ideal at all. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

How Is Bukwang Pharmaceutical's Revenue Growth Trending?

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

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 14%. This means it has also seen a slide in revenue over the longer-term as revenue is down 22% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 17% shows it's an unpleasant look.

With this in mind, we find it worrying that Bukwang Pharmaceutical's P/S exceeds that of its industry peers. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

What Does Bukwang Pharmaceutical's P/S Mean For Investors?

Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Bukwang Pharmaceutical currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

Plus, you should also learn about this 1 warning sign we've spotted with Bukwang Pharmaceutical.

If you're unsure about the strength of Bukwang Pharmaceutical's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.