The Market Doesn't Like What It Sees From Entertainment Rewards Ltd's (ASX:EAT) Revenues Yet As Shares Tumble 33%

Entertainment Rewards Ltd (ASX:EAT) shares have had a horrible month, losing 33% after a relatively good period beforehand. Looking at the bigger picture, even after this poor month the stock is up 33% in the last year.

Following the heavy fall in price, Entertainment Rewards may be sending bullish signals at the moment with its price-to-sales (or "P/S") ratio of 0.3x, since almost half of all companies in the Interactive Media and Services industry in Australia have P/S ratios greater than 2x and even P/S higher than 8x are not unusual. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

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See our latest analysis for Entertainment Rewards

How Has Entertainment Rewards Performed Recently?

The recent revenue growth at Entertainment Rewards would have to be considered satisfactory if not spectacular. Perhaps the market believes the recent revenue performance might fall short of industry figures in the near future, leading to a reduced P/S. If you 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.

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

How Is Entertainment Rewards' Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as low as Entertainment Rewards' is when the company's growth is on track to lag the industry.

Retrospectively, the last year delivered a decent 6.8% gain to the company's revenues. Still, lamentably revenue has fallen 11% in aggregate from three years ago, which is disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 2.1% shows it's an unpleasant look.

With this information, we are not surprised that Entertainment Rewards is trading at a P/S lower than the industry. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. Even just maintaining these prices could be difficult to achieve as recent revenue trends are already weighing down the shares.

The Final Word

The southerly movements of Entertainment Rewards' shares means its P/S is now sitting at a pretty low level. 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.

It's no surprise that Entertainment Rewards maintains its low P/S off the back of its sliding revenue over the medium-term. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. If recent medium-term revenue trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

Having said that, be aware Entertainment Rewards is showing 3 warning signs in our investment analysis, you should know about.

If these risks are making you reconsider your opinion on Entertainment Rewards, 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.