Lacklustre Performance Is Driving Enthusiast Gaming Holdings Inc.'s (TSE:EGLX) 27% Price Drop

To the annoyance of some shareholders, Enthusiast Gaming Holdings Inc. (TSE:EGLX) shares are down a considerable 27% in the last month, which continues a horrid run for the company. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 49% share price drop.

Since its price has dipped substantially, it would be understandable if you think Enthusiast Gaming Holdings is a stock with good investment prospects with a price-to-sales ratios (or "P/S") of 0.1x, considering almost half the companies in Canada's Interactive Media and Services industry have P/S ratios above 1.4x. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Enthusiast Gaming Holdings

What Does Enthusiast Gaming Holdings' Recent Performance Look Like?

Enthusiast Gaming Holdings 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. The P/S ratio is probably low because investors think this poor revenue performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

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

Is There Any Revenue Growth Forecasted For Enthusiast Gaming Holdings?

There's an inherent assumption that a company should underperform the industry for P/S ratios like Enthusiast Gaming Holdings' to be considered reasonable.

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 45%. This means it has also seen a slide in revenue over the longer-term as revenue is down 33% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Turning to the outlook, the next year should bring diminished returns, with revenue decreasing 21% as estimated by the three analysts watching the company. With the industry predicted to deliver 13% growth, that's a disappointing outcome.

With this in consideration, we find it intriguing that Enthusiast Gaming Holdings' P/S is closely matching its industry peers. 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 the weak outlook is weighing down the shares.

What We Can Learn From Enthusiast Gaming Holdings' P/S?

The southerly movements of Enthusiast Gaming Holdings' shares means its P/S is now sitting at a pretty low level. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Enthusiast Gaming Holdings' analyst forecasts revealed that its outlook for shrinking revenue is contributing to its low P/S. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 2 warning signs for Enthusiast Gaming Holdings you should be aware of.

If you're unsure about the strength of Enthusiast Gaming Holdings' 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.