Perfect World Co., Ltd. (SZSE:002624) Might Not Be As Mispriced As It Looks After Plunging 25%

The Perfect World Co., Ltd. (SZSE:002624) share price has softened a substantial 25% over the previous 30 days, handing back much of the gains the stock has made lately. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 16% in that time.

Following the heavy fall in price, Perfect World may be sending bullish signals at the moment with its price-to-sales (or "P/S") ratio of 3.4x, since almost half of all companies in the Entertainment industry in China have P/S ratios greater than 6.4x and even P/S higher than 13x 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.

See our latest analysis for Perfect World

How Perfect World Has Been Performing

While the industry has experienced revenue growth lately, Perfect World's revenue has gone into reverse gear, which is not great. It seems that many are expecting the poor revenue performance to persist, which has repressed the P/S ratio. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

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

How Is Perfect World's Revenue Growth Trending?

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

Retrospectively, the last year delivered a frustrating 30% 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 36% 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.

Looking ahead now, revenue is anticipated to climb by 21% during the coming year according to the nine analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 23%, which is not materially different.

With this in consideration, we find it intriguing that Perfect World's P/S is lagging behind its industry peers. It may be that most investors are not convinced the company can achieve future growth expectations.

The Bottom Line On Perfect World's P/S

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

We've seen that Perfect World currently trades on a lower than expected P/S since its forecast growth is in line with the wider industry. Despite average revenue growth estimates, there could be some unobserved threats keeping the P/S low. However, if you agree with the analysts' forecasts, you may be able to pick up the stock at an attractive price.

Plus, you should also learn about this 1 warning sign we've spotted with Perfect World.

If you're unsure about the strength of Perfect World'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.