TSE Co., Ltd's (KOSDAQ:131290) Shares Climb 28% But Its Business Is Yet to Catch Up

TSE Co., Ltd (KOSDAQ:131290) shareholders would be excited to see that the share price has had a great month, posting a 28% gain and recovering from prior weakness. Looking back a bit further, it's encouraging to see the stock is up 54% in the last year.

Since its price has surged higher, you could be forgiven for thinking TSE is a stock not worth researching with a price-to-sales ratios (or "P/S") of 2.4x, considering almost half the companies in Korea's Semiconductor industry have P/S ratios below 1.8x. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for TSE

How TSE Has Been Performing

With only a limited decrease in revenue compared to most other companies of late, TSE has been doing relatively well. It seems that many are expecting the comparatively superior revenue performance to persist, which has increased investors’ willingness to pay up for the stock. While you'd prefer that its revenue trajectory turned around, you'd at least be hoping it remains less negative than other companies, otherwise you're paying a pretty hefty price for no particular reason.

Keen to find out how analysts think TSE's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Enough Revenue Growth Forecasted For TSE?

In order to justify its P/S ratio, TSE 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 25%. This means it has also seen a slide in revenue over the longer-term as revenue is down 9.3% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Turning to the outlook, the next three years should generate growth of 12% per year as estimated by the two analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 34% per year, which is noticeably more attractive.

In light of this, it's alarming that TSE'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 TSE's P/S Mean For Investors?

TSE's P/S is on the rise since its shares have risen strongly. 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.

It comes as a surprise to see TSE trade at such a high P/S given the revenue forecasts look less than stellar. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for TSE that you should be aware of.

If these risks are making you reconsider your opinion on TSE, 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.