Unpleasant Surprises Could Be In Store For Lotte Energy Materials Corporation's (KRX:020150) Shares

Explore Lotte Energy Materials's Fair Values from the Community and select yours

When close to half the companies in the Electronic industry in Korea have price-to-sales ratios (or "P/S") below 0.8x, you may consider Lotte Energy Materials Corporation (KRX:020150) as a stock to potentially avoid with its 1.7x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

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See our latest analysis for Lotte Energy Materials

How Lotte Energy Materials Has Been Performing

Lotte Energy Materials hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. Perhaps the market is expecting the poor revenue to reverse, justifying it's current high P/S.. If not, then existing shareholders may be extremely nervous about the viability of the share price.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Lotte Energy Materials.

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

The only time you'd be truly comfortable seeing a P/S as high as Lotte Energy Materials' is when the company's growth is on track to outshine the industry.

Retrospectively, the last year delivered a frustrating 7.7% decrease to the company's top line. Regardless, revenue has managed to lift by a handy 9.0% in aggregate from three years ago, thanks to the earlier period of growth. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been mostly respectable for the company.

Turning to the outlook, the next year should generate growth of 6.0% as estimated by the nine analysts watching the company. That's shaping up to be materially lower than the 12% growth forecast for the broader industry.

With this information, we find it concerning that Lotte Energy Materials is trading at a P/S higher than the industry. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

What Does Lotte Energy Materials' P/S Mean For Investors?

Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

We've concluded that Lotte Energy Materials currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for Lotte Energy Materials with six simple checks will allow you to discover any risks that could be an issue.

If you're unsure about the strength of Lotte Energy Materials' 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.