What Thumbage Co., Ltd.'s (KOSDAQ:208640) 47% Share Price Gain Is Not Telling You

Thumbage Co., Ltd. (KOSDAQ:208640) shares have had a really impressive month, gaining 47% after a shaky period beforehand. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 2.5% in the last twelve months.

Following the firm bounce in price, you could be forgiven for thinking Thumbage is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 3.8x, considering almost half the companies in Korea's Software industry have P/S ratios below 1.5x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Thumbage

What Does Thumbage's Recent Performance Look Like?

Thumbage has been doing a good job lately as it's been growing revenue at a solid pace. Perhaps the market is expecting this decent revenue performance to beat out the industry over the near term, which has kept the P/S propped up. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

How Is Thumbage's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as steep as Thumbage's is when the company's growth is on track to outshine the industry decidedly.

Retrospectively, the last year delivered a decent 12% gain to the company's revenues. Still, lamentably revenue has fallen 50% in aggregate from three years ago, which is disappointing. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 18% shows it's an unpleasant look.

In light of this, it's alarming that Thumbage's P/S sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. 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 Final Word

The strong share price surge has lead to Thumbage's P/S soaring as well. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

We've established that Thumbage 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. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Thumbage (at least 2 which can't be ignored), and understanding these should be part of your investment process.

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.