Lacklustre Performance Is Driving Don't Nod Entertainment S.A.'s (EPA:ALDNE) 26% Price Drop

Unfortunately for some shareholders, the Don't Nod Entertainment S.A. (EPA:ALDNE) share price has dived 26% in the last thirty days, prolonging recent pain. For any long-term shareholders, the last month ends a year to forget by locking in a 51% share price decline.

Since its price has dipped substantially, Don't Nod Entertainment's price-to-sales (or "P/S") ratio of 0.3x might make it look like a buy right now compared to the Entertainment industry in France, where around half of the companies have P/S ratios above 1x and even P/S above 4x are quite common. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

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See our latest analysis for Don't Nod Entertainment

What Does Don't Nod Entertainment's Recent Performance Look Like?

With revenue that's retreating more than the industry's average of late, Don't Nod Entertainment has been very sluggish. Perhaps the market isn't expecting future revenue performance to improve, which has kept the P/S suppressed. You'd much rather the company improve its revenue performance if you still believe in the business. If not, then existing shareholders will probably struggle to get excited about the future direction 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.

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

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

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 23%. As a result, revenue from three years ago have also fallen 19% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Turning to the outlook, the next year should bring diminished returns, with revenue decreasing 48% as estimated by the three analysts watching the company. Meanwhile, the broader industry is forecast to expand by 0.3%, which paints a poor picture.

In light of this, it's understandable that Don't Nod Entertainment's P/S would sit below the majority of other companies. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Bottom Line On Don't Nod Entertainment's P/S

The southerly movements of Don't Nod Entertainment's shares means its P/S is now sitting at a pretty low level. 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.

It's clear to see that Don't Nod Entertainment maintains its low P/S on the weakness of its forecast for sliding revenue, as expected. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless there's material change, it's hard to envision a situation where the stock price will rise drastically.

Before you settle on your opinion, we've discovered 3 warning signs for Don't Nod Entertainment (1 doesn't sit too well with us!) that you should be aware of.

If you're unsure about the strength of Don't Nod Entertainment'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.