Daegu Department Store Co., Ltd.'s (KRX:006370) Business Is Trailing The Industry But Its Shares Aren't

When you see that almost half of the companies in the Multiline Retail industry in Korea have price-to-sales ratios (or "P/S") below 0.3x, Daegu Department Store Co., Ltd. (KRX:006370) looks to be giving off some sell signals with its 1.1x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Daegu Department Store

What Does Daegu Department Store's P/S Mean For Shareholders?

As an illustration, revenue has deteriorated at Daegu Department Store over the last year, which is not ideal at all. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. However, if this isn't the case, investors might get caught out paying too much for the stock.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Daegu Department Store will help you shine a light on its historical performance.

Is There Enough Revenue Growth Forecasted For Daegu Department Store?

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

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 8.7%. The last three years don't look nice either as the company has shrunk revenue by 21% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

In contrast to the company, the rest of the industry is expected to grow by 3.3% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

In light of this, it's alarming that Daegu Department Store's P/S sits above the majority of other companies. 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. 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 Key Takeaway

It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Daegu Department Store currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

Before you take the next step, you should know about the 2 warning signs for Daegu Department Store (1 is concerning!) that we have uncovered.

If you're unsure about the strength of Daegu Department Store'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.