Risks To Shareholder Returns Are Elevated At These Prices For JOONGANG ADVANCED MATERIALS Co., Ltd (KOSDAQ:051980)

When close to half the companies in the Communications industry in Korea have price-to-sales ratios (or "P/S") below 0.8x, you may consider JOONGANG ADVANCED MATERIALS Co., Ltd (KOSDAQ:051980) as a stock to avoid entirely with its 46.1x 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.

See our latest analysis for JOONGANG ADVANCED MATERIALS

How JOONGANG ADVANCED MATERIALS Has Been Performing

JOONGANG ADVANCED MATERIALS has been doing a decent job lately as it's been growing revenue at a reasonable pace. One possibility is that the P/S ratio is high because investors think this good revenue growth will be enough to outperform the broader industry in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.

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

Do Revenue Forecasts Match The High P/S Ratio?

JOONGANG ADVANCED MATERIALS' P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 4.5% last year. The latest three year period has also seen an excellent 95% overall rise in revenue, aided somewhat by its short-term performance. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 53% shows it's noticeably less attractive.

With this information, we find it concerning that JOONGANG ADVANCED MATERIALS is trading at a P/S higher than the industry. 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. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

The Final Word

We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

The fact that JOONGANG ADVANCED MATERIALS currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. Right now we aren't comfortable with the high P/S as this revenue performance isn't likely to support such positive sentiment for long. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

Before you take the next step, you should know about the 4 warning signs for JOONGANG ADVANCED MATERIALS (2 can't be ignored!) that we have uncovered.

If you're unsure about the strength of JOONGANG ADVANCED MATERIALS' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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

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.