Kornic Automation Co., Ltd.'s (KOSDAQ:391710) Share Price Could Signal Some Risk

Kornic Automation Co., Ltd.'s (KOSDAQ:391710) price-to-sales (or "P/S") ratio of 2.6x may not look like an appealing investment opportunity when you consider close to half the companies in the IT industry in Korea have P/S ratios below 0.9x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

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View our latest analysis for Kornic Automation

How Has Kornic Automation Performed Recently?

For example, consider that Kornic Automation's financial performance has been poor lately as its revenue has been in decline. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Although there are no analyst estimates available for Kornic Automation, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

What Are Revenue Growth Metrics Telling Us About The High P/S?

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

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 35%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 16% overall rise in revenue. So we can start by confirming that the company has generally done a good job of growing revenue over that time, even though it had some hiccups along the way.

Weighing that recent medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 4.9% shows it's about the same on an annualised basis.

With this information, we find it interesting that Kornic Automation is trading at a high P/S compared to the industry. Apparently many investors in the company are more bullish than recent times would indicate and aren't willing to let go of their stock right now. Nevertheless, they may be setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Final Word

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.

Our look into Kornic Automation has shown that it currently trades on a higher than expected P/S since its recent three-year growth is only in line with the wider industry forecast. Right now we are uncomfortable with the high P/S as this revenue performance isn't likely to support such positive sentiment for long. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.

You should always think about risks. Case in point, we've spotted 2 warning signs for Kornic Automation you should be aware of, and 1 of them shouldn't be ignored.

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.