Cafe24 Corp. (KOSDAQ:042000) Stocks Shoot Up 28% But Its P/S Still Looks Reasonable

Cafe24 Corp. (KOSDAQ:042000) shareholders have had their patience rewarded with a 28% share price jump in the last month. Looking further back, the 22% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

Following the firm bounce in price, given around half the companies in Korea's IT industry have price-to-sales ratios (or "P/S") below 0.7x, you may consider Cafe24 as a stock to avoid entirely with its 3x 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 so lofty.

Check out our latest analysis for Cafe24

What Does Cafe24's P/S Mean For Shareholders?

With revenue growth that's superior to most other companies of late, Cafe24 has been doing relatively well. The P/S is probably high because investors think this strong revenue performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Cafe24.

How Is Cafe24's Revenue Growth Trending?

In order to justify its P/S ratio, Cafe24 would need to produce outstanding growth that's well in excess of the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 6.4% last year. The solid recent performance means it was also able to grow revenue by 8.4% in total over the last three years. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

Turning to the outlook, the next three years should generate growth of 11% per annum as estimated by the dual analysts watching the company. Meanwhile, the rest of the industry is forecast to only expand by 8.7% per annum, which is noticeably less attractive.

With this in mind, it's not hard to understand why Cafe24's P/S is high relative to its industry peers. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From Cafe24's P/S?

Shares in Cafe24 have seen a strong upwards swing lately, which has really helped boost its P/S figure. 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.

Our look into Cafe24 shows that its P/S ratio remains high on the merit of its strong future revenues. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

Before you settle on your opinion, we've discovered 3 warning signs for Cafe24 that you should be aware of.

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.