Don't Nod Entertainment S.A.'s (EPA:ALDNE) Business Is Trailing The Industry But Its Shares Aren't

Don't Nod Entertainment S.A.'s (EPA:ALDNE) price-to-sales (or "P/S") ratio of 3.1x may not look like an appealing investment opportunity when you consider close to half the companies in the Entertainment industry in France have P/S ratios below 1.8x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

Check out our latest analysis for Don't Nod Entertainment

How Has Don't Nod Entertainment Performed Recently?

With its revenue growth in positive territory compared to the declining revenue of most other companies, Don't Nod Entertainment has been doing quite well of late. The P/S ratio is probably high because investors think the company will continue to navigate the broader industry headwinds better than most. If not, then existing shareholders might 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 Don't Nod Entertainment will help you uncover what's on the horizon.

Do Revenue Forecasts Match The High P/S Ratio?

Don't Nod Entertainment's P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

Retrospectively, the last year delivered a decent 13% gain to the company's revenues. The latest three year period has also seen an excellent 66% overall rise in revenue, aided somewhat by its short-term performance. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Shifting to the future, estimates from the three analysts covering the company suggest revenue should grow by 0.9% per year over the next three years. That's shaping up to be materially lower than the 9.7% each year growth forecast for the broader industry.

In light of this, it's alarming that Don't Nod Entertainment's P/S sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

The Bottom Line On Don't Nod Entertainment's 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.

We've concluded that Don't Nod Entertainment currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. Right now we aren't comfortable with the high P/S as the predicted future revenues aren't likely to support such positive sentiment for long. At these price levels, investors should remain cautious, particularly if things don't improve.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Don't Nod Entertainment (at least 2 which are concerning), and understanding these should be part of your investment process.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.