Hengdian Entertainment Co.,LTD (SHSE:603103) Stock's 25% Dive Might Signal An Opportunity But It Requires Some Scrutiny

Hengdian Entertainment Co.,LTD (SHSE:603103) shares have retraced a considerable 25% in the last month, reversing a fair amount of their solid recent performance. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 30% in that time.

Since its price has dipped substantially, Hengdian EntertainmentLTD may be sending bullish signals at the moment with its price-to-sales (or "P/S") ratio of 3.9x, since almost half of all companies in the Entertainment industry in China have P/S ratios greater than 6.2x and even P/S higher than 12x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

Check out our latest analysis for Hengdian EntertainmentLTD

How Has Hengdian EntertainmentLTD Performed Recently?

Hengdian EntertainmentLTD could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. It seems that many are expecting the poor revenue performance to persist, which has repressed the P/S ratio. So while you could say the stock is cheap, investors will be looking for improvement before they see it as good value.

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

Is There Any Revenue Growth Forecasted For Hengdian EntertainmentLTD?

In order to justify its P/S ratio, Hengdian EntertainmentLTD would need to produce sluggish growth that's trailing the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 6.6%. The last three years don't look nice either as the company has shrunk revenue by 16% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Shifting to the future, estimates from the dual analysts covering the company suggest revenue should grow by 21% over the next year. Meanwhile, the rest of the industry is forecast to expand by 23%, which is not materially different.

In light of this, it's peculiar that Hengdian EntertainmentLTD's P/S sits below the majority of other companies. Apparently some shareholders are doubtful of the forecasts and have been accepting lower selling prices.

What Does Hengdian EntertainmentLTD's P/S Mean For Investors?

Hengdian EntertainmentLTD's recently weak share price has pulled its P/S back below other Entertainment companies. 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.

It looks to us like the P/S figures for Hengdian EntertainmentLTD remain low despite growth that is expected to be in line with other companies in the industry. The low P/S could be an indication that the revenue growth estimates are being questioned by the market. At least the risk of a price drop looks to be subdued, but investors seem to think future revenue could see some volatility.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Hengdian EntertainmentLTD that you need to be mindful of.

If these risks are making you reconsider your opinion on Hengdian EntertainmentLTD, 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.