Optimistic Investors Push KOREA PHARMA Co., Ltd. (KOSDAQ:032300) Shares Up 29% But Growth Is Lacking

Simply Wall St · 10/16 22:09

KOREA PHARMA Co., Ltd. (KOSDAQ:032300) shareholders would be excited to see that the share price has had a great month, posting a 29% gain and recovering from prior weakness. Taking a wider view, although not as strong as the last month, the full year gain of 14% is also fairly reasonable.

Following the firm bounce in price, given close to half the companies operating in Korea's Pharmaceuticals industry have price-to-sales ratios (or "P/S") below 0.9x, you may consider KOREA PHARMA as a stock to potentially avoid with its 2.8x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for KOREA PHARMA

ps-multiple-vs-industry
KOSDAQ:A032300 Price to Sales Ratio vs Industry October 16th 2024

What Does KOREA PHARMA's P/S Mean For Shareholders?

As an illustration, revenue has deteriorated at KOREA PHARMA over the last year, which is not ideal at all. 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.

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 KOREA PHARMA's earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For KOREA PHARMA?

KOREA PHARMA's P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

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 5.6%. That put a dampener on the good run it was having over the longer-term as its three-year revenue growth is still a noteworthy 8.1% in total. 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.

This is in contrast to the rest of the industry, which is expected to grow by 61% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this in mind, we find it worrying that KOREA PHARMA's P/S exceeds that of its industry peers. 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. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Bottom Line On KOREA PHARMA's P/S

KOREA PHARMA's P/S is on the rise since its shares have risen strongly. 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 examination of KOREA PHARMA revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. When we see slower than industry revenue growth but an elevated P/S, there's considerable risk of the share price declining, sending the P/S lower. 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.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with KOREA PHARMA (at least 1 which is a bit unpleasant), and understanding them should be part of your investment process.

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