Highlight Communications AG's (ETR:HLG) Popularity With Investors Is Under Threat From Overpricing

It's not a stretch to say that Highlight Communications AG's (ETR:HLG) price-to-sales (or "P/S") ratio of 0.1x right now seems quite "middle-of-the-road" for companies in the Entertainment industry in Germany, where the median P/S ratio is around 0.6x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

Check out our latest analysis for Highlight Communications

What Does Highlight Communications' P/S Mean For Shareholders?

While the industry has experienced revenue growth lately, Highlight Communications' revenue has gone into reverse gear, which is not great. One possibility is that the P/S ratio is moderate because investors think this poor revenue performance will turn around. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

Keen to find out how analysts think Highlight Communications' future stacks up against the industry? In that case, our free report is a great place to start.

What Are Revenue Growth Metrics Telling Us About The P/S?

Highlight Communications' P/S ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 4.4%. This means it has also seen a slide in revenue over the longer-term as revenue is down 11% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Looking ahead now, revenue is anticipated to slump, contracting by 3.6% during the coming year according to the lone analyst following the company. That's not great when the rest of the industry is expected to grow by 7.3%.

In light of this, it's somewhat alarming that Highlight Communications' P/S sits in line with the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as these declining revenues are likely to weigh on the share price eventually.

What We Can Learn From Highlight Communications' P/S?

While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Our check of Highlight Communications' analyst forecasts revealed that its outlook for shrinking revenue isn't bringing down its P/S as much as we would have predicted. With this in mind, we don't feel the current P/S is justified as declining revenues are unlikely to support a more positive sentiment for long. If the poor revenue outlook tells us one thing, it's that these current price levels could be unsustainable.

Before you settle on your opinion, we've discovered 3 warning signs for Highlight Communications (1 is a bit concerning!) that you should be aware of.

If you're unsure about the strength of Highlight Communications' 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.