SK hynix Inc.'s (KRX:000660) Business Is Trailing The Industry But Its Shares Aren't

When close to half the companies in the Semiconductor industry in Korea have price-to-sales ratios (or "P/S") below 1.3x, you may consider SK hynix Inc. (KRX:000660) as a stock to potentially avoid with its 1.8x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

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What Does SK hynix's P/S Mean For Shareholders?

SK hynix certainly has been doing a good job lately as it's been growing revenue more than most other companies. The P/S is probably high because investors think this strong revenue performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

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Is There Enough Revenue Growth Forecasted For SK hynix?

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

Retrospectively, the last year delivered an exceptional 78% gain to the company's top line. The strong recent performance means it was also able to grow revenue by 53% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenue over that time.

Looking ahead now, revenue is anticipated to climb by 14% per annum during the coming three years according to the analysts following the company. With the industry predicted to deliver 15% growth each year, the company is positioned for a comparable revenue result.

With this in consideration, we find it intriguing that SK hynix's P/S is higher than its industry peers. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as this level of revenue growth is likely to weigh down the share price eventually.

The Final Word

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.

Seeing as its revenues are forecast to grow in line with the wider industry, it would appear that SK hynix currently trades on a higher than expected P/S. Right now we are uncomfortable with the relatively high share price as the predicted future revenues aren't likely to support such positive sentiment for long. Unless the company can jump ahead of the rest of the industry in the short-term, it'll be a challenge to maintain the share price at current levels.

A lot of potential risks can sit within a company's balance sheet. Take a look at our free balance sheet analysis for SK hynix with six simple checks on some of these key factors.

If you're unsure about the strength of SK hynix'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.