Why Investors Shouldn't Be Surprised By Ecopro Co., Ltd.'s (KOSDAQ:086520) 35% Share Price Surge

Ecopro Co., Ltd. (KOSDAQ:086520) shares have continued their recent momentum with a 35% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 71% in the last year.

After such a large jump in price, when almost half of the companies in Korea's Electrical industry have price-to-sales ratios (or "P/S") below 1.7x, you may consider Ecopro as a stock not worth researching with its 4.7x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

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View our latest analysis for Ecopro

How Has Ecopro Performed Recently?

Recent times haven't been great for Ecopro as its revenue has been falling quicker than most other companies. One possibility is that the P/S ratio is high because investors think the company will turn things around completely and accelerate past most others in the industry. If not, then existing shareholders may be very nervous about the viability of the share price.

Want the full picture on analyst estimates for the company? Then our free report on Ecopro will help you uncover what's on the horizon.

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

Ecopro's 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.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 11%. This means it has also seen a slide in revenue over the longer-term as revenue is down 18% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Turning to the outlook, the next year should generate growth of 39% as estimated by the lone analyst watching the company. With the industry only predicted to deliver 17%, the company is positioned for a stronger revenue result.

With this in mind, it's not hard to understand why Ecopro's P/S is high relative to its industry peers. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

The strong share price surge has lead to Ecopro's P/S soaring as well. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our look into Ecopro shows that its P/S ratio remains high on the merit of its strong future revenues. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless these conditions change, they will continue to provide strong support to the share price.

You always need to take note of risks, for example - Ecopro has 3 warning signs we think you should be aware of.

If these risks are making you reconsider your opinion on Ecopro, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.