There's Reason For Concern Over RF Materials Co., Ltd.'s (KOSDAQ:327260) Price

With a median price-to-sales (or "P/S") ratio of close to 1.3x in the Semiconductor industry in Korea, you could be forgiven for feeling indifferent about RF Materials Co., Ltd.'s (KOSDAQ:327260) P/S ratio of 1x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

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Check out our latest analysis for RF Materials

What Does RF Materials' P/S Mean For Shareholders?

For example, consider that RF Materials' financial performance has been poor lately as its revenue has been in decline. Perhaps investors believe the recent revenue performance is enough to keep in line with the industry, which is keeping the P/S from dropping off. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

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

How Is RF Materials' Revenue Growth Trending?

There's an inherent assumption that a company should be matching the industry for P/S ratios like RF Materials' to be considered reasonable.

Retrospectively, the last year delivered a frustrating 1.4% decrease to the company's top line. Regardless, revenue has managed to lift by a handy 16% in aggregate from three years ago, thanks to the earlier period of growth. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of revenue growth.

This is in contrast to the rest of the industry, which is expected to grow by 27% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this in mind, we find it intriguing that RF Materials' P/S is comparable to that of its industry peers. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as a continuation of recent revenue trends is likely to weigh down the shares eventually.

What We Can Learn From RF Materials' P/S?

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.

We've established that RF Materials' average P/S is a bit surprising since its recent three-year growth is lower than the wider industry forecast. When we see weak revenue with slower than industry growth, we suspect the share price is at risk of declining, bringing the P/S back in line with expectations. Unless the recent medium-term conditions improve, it's hard to accept the current share price as fair value.

It is also worth noting that we have found 2 warning signs for RF Materials (1 can't be ignored!) that you need to take into consideration.

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.