Investor Optimism Abounds Dong-A ST Co., Ltd. (KRX:170900) But Growth Is Lacking

There wouldn't be many who think Dong-A ST Co., Ltd.'s (KRX:170900) price-to-sales (or "P/S") ratio of 1x is worth a mention when the median P/S for the Pharmaceuticals industry in Korea is very similar. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

View our latest analysis for Dong-A ST

What Does Dong-A ST's Recent Performance Look Like?

With revenue growth that's inferior to most other companies of late, Dong-A ST has been relatively sluggish. It might be that many expect the uninspiring revenue performance to strengthen positively, which has kept the P/S ratio from falling. However, if this isn't the case, investors might get caught out paying too much for the stock.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Dong-A ST.

Do Revenue Forecasts Match The P/S Ratio?

In order to justify its P/S ratio, Dong-A ST would need to produce growth that's similar to the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 7.3% last year. The latest three year period has also seen a 28% overall rise in revenue, aided somewhat by its short-term performance. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

Shifting to the future, estimates from the six analysts covering the company suggest revenue growth is heading into negative territory, declining 1.0% over the next year. With the industry predicted to deliver 59% growth, that's a disappointing outcome.

With this in consideration, we think it doesn't make sense that Dong-A ST's P/S is closely matching its industry peers. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as these declining revenues are likely to weigh on the share price eventually.

The Final Word

Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our check of Dong-A ST's analyst forecasts revealed that its outlook for shrinking revenue isn't bringing down its P/S as much as we would have predicted. With this in mind, we don't feel the current P/S is justified as declining revenues are unlikely to support a more positive sentiment for long. If the declining revenues were to materialize in the form of a declining share price, shareholders will be feeling the pinch.

Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for Dong-A ST with six simple checks on some of these key factors.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.