Ildong Pharmaceutical Co., Ltd. (KRX:249420) Stock Rockets 49% As Investors Are Less Pessimistic Than Expected

Ildong Pharmaceutical Co., Ltd. (KRX:249420) shares have continued their recent momentum with a 49% gain in the last month alone. The annual gain comes to 273% following the latest surge, making investors sit up and take notice.

After such a large jump in price, given close to half the companies operating in Korea's Pharmaceuticals industry have price-to-sales ratios (or "P/S") below 0.9x, you may consider Ildong Pharmaceutical as a stock to potentially avoid with its 2.4x P/S ratio. 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.

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See our latest analysis for Ildong Pharmaceutical

What Does Ildong Pharmaceutical's P/S Mean For Shareholders?

Ildong Pharmaceutical could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. One possibility is that the P/S ratio is high because investors think this poor revenue performance will turn the corner. 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 Ildong Pharmaceutical.

Do Revenue Forecasts Match The High P/S Ratio?

In order to justify its P/S ratio, Ildong Pharmaceutical would need to produce impressive growth in excess of the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 5.7%. This means it has also seen a slide in revenue over the longer-term as revenue is down 8.4% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Turning to the outlook, the next year should generate growth of 9.9% as estimated by the sole analyst watching the company. That's shaping up to be materially lower than the 31% growth forecast for the broader industry.

In light of this, it's alarming that Ildong Pharmaceutical's P/S sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

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

Ildong Pharmaceutical's P/S is on the rise since its shares have risen strongly. 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 concluded that Ildong Pharmaceutical currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. The weakness in the company's revenue estimate doesn't bode well for the elevated P/S, which could take a fall if the revenue sentiment doesn't improve. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Ildong Pharmaceutical that you should be aware of.

If you're unsure about the strength of Ildong 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.