Lacklustre Performance Is Driving Kaiser (China) Culture Co., LTD's (SZSE:002425) 28% Price Drop

Kaiser (China) Culture Co., LTD (SZSE:002425) shareholders won't be pleased to see that the share price has had a very rough month, dropping 28% and undoing the prior period's positive performance. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 57% loss during that time.

After such a large drop in price, Kaiser (China) Culture's price-to-sales (or "P/S") ratio of 3.8x might make it look like a buy right now compared to the Entertainment industry in China, where around half of the companies have P/S ratios above 6.3x and even P/S above 13x are quite common. 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 Kaiser (China) Culture

How Has Kaiser (China) Culture Performed Recently?

Revenue has risen firmly for Kaiser (China) Culture recently, which is pleasing to see. Perhaps the market is expecting this acceptable revenue performance to take a dive, which has kept the P/S suppressed. If that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction of the share price.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Kaiser (China) Culture's earnings, revenue and cash flow.

Is There Any Revenue Growth Forecasted For Kaiser (China) Culture?

In order to justify its P/S ratio, Kaiser (China) Culture would need to produce sluggish growth that's trailing the industry.

If we review the last year of revenue growth, the company posted a worthy increase of 13%. Ultimately though, it couldn't turn around the poor performance of the prior period, with revenue shrinking 35% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

In contrast to the company, the rest of the industry is expected to grow by 27% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this information, we are not surprised that Kaiser (China) Culture is trading at a P/S lower than the industry. However, we think shrinking revenues are unlikely to lead to a stable P/S over the longer term, which could set up shareholders for future disappointment. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

The Key Takeaway

Kaiser (China) Culture's recently weak share price has pulled its P/S back below other Entertainment companies. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

It's no surprise that Kaiser (China) Culture maintains its low P/S off the back of its sliding revenue over the medium-term. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises either. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Before you settle on your opinion, we've discovered 2 warning signs for Kaiser (China) Culture that you should be aware of.

If you're unsure about the strength of Kaiser (China) Culture'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.