There's Reason For Concern Over YOOZOO Interactive Co., Ltd.'s (SZSE:002174) Massive 28% Price Jump

YOOZOO Interactive Co., Ltd. (SZSE:002174) shares have continued their recent momentum with a 28% gain in the last month alone. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 12% over that time.

Although its price has surged higher, it's still not a stretch to say that YOOZOO Interactive's price-to-sales (or "P/S") ratio of 6.6x right now seems quite "middle-of-the-road" compared to the Entertainment industry in China, where the median P/S ratio is around 7.2x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

See our latest analysis for YOOZOO Interactive

What Does YOOZOO Interactive's Recent Performance Look Like?

YOOZOO Interactive 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. One possibility is that the P/S ratio is moderate because investors think this poor revenue performance will turn around. If not, then existing shareholders may be a little nervous about the viability of the share price.

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

How Is YOOZOO Interactive's Revenue Growth Trending?

The only time you'd be comfortable seeing a P/S like YOOZOO Interactive's is when the company's growth is tracking the industry closely.

Retrospectively, the last year delivered a frustrating 15% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 59% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Shifting to the future, estimates from the two analysts covering the company suggest revenue should grow by 15% over the next year. With the industry predicted to deliver 33% growth, the company is positioned for a weaker revenue result.

In light of this, it's curious that YOOZOO Interactive's P/S sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

What We Can Learn From YOOZOO Interactive's P/S?

Its shares have lifted substantially and now YOOZOO Interactive's P/S is back within range of the industry median. 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.

Given that YOOZOO Interactive's revenue growth projections are relatively subdued in comparison to the wider industry, it comes as a surprise to see it trading at its current P/S ratio. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Having said that, be aware YOOZOO Interactive is showing 1 warning sign in our investment analysis, you should know about.

If you're unsure about the strength of YOOZOO Interactive's 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.