It's Down 30% But ESE Entertainment Inc. (CVE:ESE) Could Be Riskier Than It Looks

ESE Entertainment Inc. (CVE:ESE) shares have had a horrible month, losing 30% after a relatively good period beforehand. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 78% loss during that time.

Although its price has dipped substantially, it's still not a stretch to say that ESE Entertainment's price-to-sales (or "P/S") ratio of 0.3x right now seems quite "middle-of-the-road" compared to the Entertainment industry in Canada, where the median P/S ratio is around 0.6x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

View our latest analysis for ESE Entertainment

How Has ESE Entertainment Performed Recently?

For example, consider that ESE Entertainment's financial performance has been poor lately as its revenue has been in decline. Perhaps investors believe the recent revenue performance is enough to keep in line with the industry, which is keeping the P/S from dropping off. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

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

Is There Some Revenue Growth Forecasted For ESE Entertainment?

In order to justify its P/S ratio, ESE Entertainment would need to produce growth that's similar to the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 16%. In spite of this, the company still managed 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, but investors will want to ask why it is now in decline.

Comparing that recent medium-term revenue trajectory with the industry's one-year growth forecast of 25% shows it's noticeably more attractive.

With this information, we find it interesting that ESE Entertainment is trading at a fairly similar P/S compared to the industry. It may be that most investors are not convinced the company can maintain its recent growth rates.

What We Can Learn From ESE Entertainment's P/S?

With its share price dropping off a cliff, the P/S for ESE Entertainment looks to be in line with the rest of the Entertainment industry. 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.

We've established that ESE Entertainment currently trades on a lower than expected P/S since its recent three-year growth is higher than the wider industry forecast. It'd be fair to assume that potential risks the company faces could be the contributing factor to the lower than expected P/S. At least the risk of a price drop looks to be subdued if recent medium-term revenue trends continue, but investors seem to think future revenue could see some volatility.

You should always think about risks. Case in point, we've spotted 5 warning signs for ESE Entertainment you should be aware of, and 3 of them can't be ignored.

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.