Insufficient Growth At e-LITECOM CO., Ltd. (KOSDAQ:041520) Hampers Share Price

You may think that with a price-to-sales (or "P/S") ratio of 0.8x e-LITECOM CO., Ltd. (KOSDAQ:041520) is a stock worth checking out, seeing as almost half of all the Semiconductor companies in Korea have P/S ratios greater than 1.9x and even P/S higher than 4x 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 limited.

See our latest analysis for e-LITECOM

How Has e-LITECOM Performed Recently?

As an illustration, revenue has deteriorated at e-LITECOM over the last year, which is not ideal at all. Perhaps the market believes the recent revenue performance isn't good enough to keep up the industry, causing the P/S ratio to suffer. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

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

What Are Revenue Growth Metrics Telling Us About The Low P/S?

The only time you'd be truly comfortable seeing a P/S as low as e-LITECOM's is when the company's growth is on track to lag the industry.

Retrospectively, the last year delivered a frustrating 30% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 57% in total over the last three years. 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 73% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this information, we are not surprised that e-LITECOM is trading at a P/S lower than the industry. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

The Final Word

While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

As we suspected, our examination of e-LITECOM revealed its shrinking revenue over the medium-term is contributing to its low P/S, given the industry is set to grow. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises either. If recent medium-term revenue trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with e-LITECOM (at least 2 which are potentially serious), and understanding these should be part of your investment process.

If these risks are making you reconsider your opinion on e-LITECOM, 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.