Revenues Tell The Story For PlaySide Studios Limited (ASX:PLY) As Its Stock Soars 33%

The PlaySide Studios Limited (ASX:PLY) share price has done very well over the last month, posting an excellent gain of 33%. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 6.0% in the last twelve months.

Since its price has surged higher, you could be forgiven for thinking PlaySide Studios is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 6.6x, considering almost half the companies in Australia's Entertainment industry have P/S ratios below 1.7x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

Check out our latest analysis for PlaySide Studios

What Does PlaySide Studios' P/S Mean For Shareholders?

Recent times haven't been great for PlaySide Studios as its revenue has been rising slower than most other companies. It might be that many expect the uninspiring revenue performance to recover significantly, which has kept the P/S ratio from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on PlaySide Studios.

Do Revenue Forecasts Match The High P/S Ratio?

The only time you'd be truly comfortable seeing a P/S as steep as PlaySide Studios' is when the company's growth is on track to outshine the industry decidedly.

If we review the last year of revenue growth, the company posted a terrific increase of 31%. This great performance means it was also able to deliver immense revenue growth over the last three years. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Looking ahead now, revenue is anticipated to climb by 26% per year during the coming three years according to the three analysts following the company. That's shaping up to be materially higher than the 9.2% per year growth forecast for the broader industry.

With this information, we can see why PlaySide Studios is trading at such a high P/S compared to the industry. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What Does PlaySide Studios' P/S Mean For Investors?

The strong share price surge has lead to PlaySide Studios' P/S soaring as well. 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.

As we suspected, our examination of PlaySide Studios' analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. Unless these conditions change, they will continue to provide strong support to the share price.

A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for PlaySide Studios with six simple checks will allow you to discover any risks that could be an issue.

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

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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.