What POONGWON PRECISION CO.,Ltd.'s (KOSDAQ:371950) 26% Share Price Gain Is Not Telling You

POONGWON PRECISION CO.,Ltd. (KOSDAQ:371950) shareholders have had their patience rewarded with a 26% share price jump in the last month. The last 30 days bring the annual gain to a very sharp 33%.

Since its price has surged higher, given around half the companies in Korea's Electronic industry have price-to-sales ratios (or "P/S") below 0.7x, you may consider POONGWON PRECISIONLtd as a stock to avoid entirely with its 5.7x 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.

We've discovered 2 warning signs about POONGWON PRECISIONLtd. View them for free.

Check out our latest analysis for POONGWON PRECISIONLtd

How POONGWON PRECISIONLtd Has Been Performing

Revenue has risen firmly for POONGWON PRECISIONLtd 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. However, if this isn't the case, investors might get caught out paying too much for the stock.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on POONGWON PRECISIONLtd's earnings, revenue and cash flow.

Do Revenue Forecasts Match The High P/S Ratio?

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

Retrospectively, the last year delivered a decent 14% gain to the company's revenues. The solid recent performance means it was also able to grow revenue by 17% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

Weighing that recent medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 4.6% shows it's about the same on an annualised basis.

With this information, we find it interesting that POONGWON PRECISIONLtd 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. Although, additional gains will be difficult to achieve as a continuation of recent revenue trends would weigh down the share price eventually.

What Does POONGWON PRECISIONLtd's P/S Mean For Investors?

POONGWON PRECISIONLtd's P/S has grown nicely over the last month thanks to a handy boost in the share price. 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.

Our look into POONGWON PRECISIONLtd 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.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with POONGWON PRECISIONLtd (at least 1 which is significant), and understanding these should be part of your investment process.

If you're unsure about the strength of POONGWON PRECISIONLtd'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.