Some Confidence Is Lacking In ESTsoft Corp. (KOSDAQ:047560) As Shares Slide 26%

ESTsoft Corp. (KOSDAQ:047560) shareholders that were waiting for something to happen have been dealt a blow with a 26% share price drop in the last month. Looking at the bigger picture, even after this poor month the stock is up 25% in the last year.

Although its price has dipped substantially, you could still be forgiven for feeling indifferent about ESTsoft's P/S ratio of 2.1x, since the median price-to-sales (or "P/S") ratio for the Software industry in Korea is also close to 2.2x. 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.

View our latest analysis for ESTsoft

What Does ESTsoft's Recent Performance Look Like?

ESTsoft has been doing a good job lately as it's been growing revenue at a solid pace. Perhaps the market is expecting future revenue performance to only keep up with the broader industry, which has keeping the P/S in line with expectations. Those who are bullish on ESTsoft will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

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

Is There Some Revenue Growth Forecasted For ESTsoft?

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

Retrospectively, the last year delivered an exceptional 16% gain to the company's top line. The latest three year period has also seen a 11% overall rise in revenue, aided extensively by its short-term performance. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 37% shows it's noticeably less attractive.

With this information, we find it interesting that ESTsoft is trading at a fairly similar P/S compared to the industry. 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 ESTsoft's P/S?

ESTsoft's plummeting stock price has brought its P/S back to a similar region as the rest of the industry. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that ESTsoft's average P/S is a bit surprising since its recent three-year growth is lower than the wider industry forecast. Right now we are uncomfortable with the P/S as this revenue performance isn't likely to support a more positive sentiment for long. If recent medium-term revenue trends continue, the probability of a share price decline will become quite substantial, placing shareholders at risk.

There are also other vital risk factors to consider and we've discovered 2 warning signs for ESTsoft (1 can't be ignored!) that you should be aware of before investing here.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com