Investor Optimism Abounds Nexa Dynamics Co., Ltd. (KOSDAQ:351320) But Growth Is Lacking

Nexa Dynamics Co., Ltd.'s (KOSDAQ:351320) price-to-sales (or "P/S") ratio of 4x may look like a poor investment opportunity when you consider close to half the companies in the Semiconductor industry in Korea have P/S ratios below 1.2x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

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Check out our latest analysis for Nexa Dynamics

What Does Nexa Dynamics' P/S Mean For Shareholders?

Revenue has risen at a steady rate over the last year for Nexa Dynamics, which is generally not a bad outcome. It might be that many expect the reasonable revenue performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Nexa Dynamics' earnings, revenue and cash flow.

How Is Nexa Dynamics' Revenue Growth Trending?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Nexa Dynamics' to be considered reasonable.

If we review the last year of revenue growth, the company posted a worthy increase of 5.7%. Still, lamentably revenue has fallen 60% in aggregate from three years ago, which is disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 27% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

In light of this, it's alarming that Nexa Dynamics' P/S sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

The Key Takeaway

Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

We've established that Nexa Dynamics currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. Should recent medium-term revenue trends persist, it would pose a significant risk to existing shareholders' investments and prospective investors will have a hard time accepting the current value of the stock.

Having said that, be aware Nexa Dynamics is showing 4 warning signs in our investment analysis, and 2 of those are concerning.

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.