Asia Pacific Satellite Inc.'s (KOSDAQ:211270) 26% Share Price Surge Not Quite Adding Up

Asia Pacific Satellite Inc. (KOSDAQ:211270) shareholders would be excited to see that the share price has had a great month, posting a 26% gain and recovering from prior weakness. Longer-term shareholders would be thankful for the recovery in the share price since it's now virtually flat for the year after the recent bounce.

Following the firm bounce in price, you could be forgiven for thinking Asia Pacific Satellite is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 3.5x, considering almost half the companies in Korea's Communications industry have P/S ratios below 1.1x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

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See our latest analysis for Asia Pacific Satellite

How Asia Pacific Satellite Has Been Performing

Revenue has risen firmly for Asia Pacific Satellite recently, which is pleasing to see. It might be that many expect the respectable revenue performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

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

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Asia Pacific Satellite's to be considered reasonable.

Retrospectively, the last year delivered a decent 14% gain to the company's revenues. The latest three year period has also seen a 8.6% overall rise in revenue, aided somewhat by its short-term performance. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 51% shows it's noticeably less attractive.

In light of this, it's alarming that Asia Pacific Satellite's P/S sits above the majority of other companies. 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.

What Does Asia Pacific Satellite's P/S Mean For Investors?

Shares in Asia Pacific Satellite have seen a strong upwards swing lately, which has really helped boost its P/S figure. 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 examination of Asia Pacific Satellite 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 observe slower-than-industry revenue growth alongside a high P/S ratio, we assume there to be a significant risk of the share price decreasing, which would result in a lower P/S ratio. If recent medium-term revenue trends continue, it will place 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. You can assess many of the main risks through our free balance sheet analysis for Asia Pacific Satellite with six simple checks.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.