With a price-to-sales (or "P/S") ratio of 1.1x FriendTimes Inc. (HKG:6820) may be sending bullish signals at the moment, given that almost half of all the Entertainment companies in Hong Kong have P/S ratios greater than 1.6x and even P/S higher than 4x are not unusual. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.
Check out our latest analysis for FriendTimes
How Has FriendTimes Performed Recently?
FriendTimes 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. It seems that many are expecting the poor revenue performance to persist, which has repressed the P/S ratio. If you still like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.
If you'd like to see what analysts are forecasting going forward, you should check out our free report on FriendTimes.Is There Any Revenue Growth Forecasted For FriendTimes?
In order to justify its P/S ratio, FriendTimes would need to produce sluggish growth that's trailing 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 27%. The last three years don't look nice either as the company has shrunk revenue by 51% in aggregate. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.
Turning to the outlook, the next year should generate growth of 35% as estimated by the one analyst watching the company. Meanwhile, the rest of the industry is forecast to only expand by 12%, which is noticeably less attractive.
In light of this, it's peculiar that FriendTimes' P/S sits below the majority of other companies. It looks like most investors are not convinced at all that the company can achieve future growth expectations.
The Key Takeaway
While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.
FriendTimes' analyst forecasts revealed that its superior revenue outlook isn't contributing to its P/S anywhere near as much as we would have predicted. The reason for this depressed P/S could potentially be found in the risks the market is pricing in. It appears the market could be anticipating revenue instability, because these conditions should normally provide a boost to the share price.
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 FriendTimes with six simple checks.
If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.
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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.