Shenzhen Zqgame Co., Ltd's (SZSE:300052) 26% Cheaper Price Remains In Tune With Revenues

Shenzhen Zqgame Co., Ltd (SZSE:300052) shares have retraced a considerable 26% in the last month, reversing a fair amount of their solid recent performance. Longer-term shareholders would now have taken a real hit with the stock declining 8.4% in the last year.

Even after such a large drop in price, when almost half of the companies in China's Entertainment industry have price-to-sales ratios (or "P/S") below 6.4x, you may still consider Shenzhen Zqgame as a stock not worth researching with its 16.6x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

Check out our latest analysis for Shenzhen Zqgame

What Does Shenzhen Zqgame's P/S Mean For Shareholders?

While the industry has experienced revenue growth lately, Shenzhen Zqgame's revenue has gone into reverse gear, which is not great. It might be that many expect the dour revenue performance to recover substantially, which has kept the P/S from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

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

Is There Enough Revenue Growth Forecasted For Shenzhen Zqgame?

The only time you'd be truly comfortable seeing a P/S as steep as Shenzhen Zqgame's is when the company's growth is on track to outshine the industry decidedly.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 2.3%. The last three years don't look nice either as the company has shrunk revenue by 32% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Turning to the outlook, the next year should generate growth of 28% as estimated by the sole analyst watching the company. With the industry only predicted to deliver 23%, the company is positioned for a stronger revenue result.

In light of this, it's understandable that Shenzhen Zqgame's P/S sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

Even after such a strong price drop, Shenzhen Zqgame's P/S still exceeds the industry median significantly. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Shenzhen Zqgame maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Entertainment industry, as expected. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Shenzhen Zqgame (of which 1 makes us a bit uncomfortable!) you should know about.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.