Risks Still Elevated At These Prices As Konan Technology Inc. (KOSDAQ:402030) Shares Dive 33%

Konan Technology Inc. (KOSDAQ:402030) shareholders won't be pleased to see that the share price has had a very rough month, dropping 33% and undoing the prior period's positive performance. Looking at the bigger picture, even after this poor month the stock is up 91% in the last year.

Even after such a large drop in price, when almost half of the companies in Korea's Software industry have price-to-sales ratios (or "P/S") below 2.1x, you may still consider Konan Technology as a stock not worth researching with its 10.8x 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 so lofty.

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See our latest analysis for Konan Technology

How Konan Technology Has Been Performing

Revenue has risen firmly for Konan Technology recently, which is pleasing to see. One possibility is that the P/S ratio is high because investors think this respectable revenue growth will be enough to outperform the broader industry in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

Is There Enough Revenue Growth Forecasted For Konan Technology?

The only time you'd be truly comfortable seeing a P/S as steep as Konan Technology'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. This was backed up an excellent period prior to see revenue up by 52% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenues over that time.

Weighing that recent medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 14% shows it's about the same on an annualised basis.

With this in mind, we find it intriguing that Konan Technology's P/S exceeds that of its industry peers. 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. Although, additional gains will be difficult to achieve as a continuation of recent revenue trends would weigh down the share price eventually.

What We Can Learn From Konan Technology's P/S?

Even after such a strong price drop, Konan Technology's P/S still exceeds the industry median significantly. 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.

Our examination of Konan Technology revealed its three-year revenue trends aren't impacting its high P/S as much as we would have predicted, given they look similar to current industry expectations. 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 Konan Technology you should be aware of.

If you're unsure about the strength of Konan Technology'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.