Some Confidence Is Lacking In Ubisoft Entertainment SA (EPA:UBI) As Shares Slide 25%

The Ubisoft Entertainment SA (EPA:UBI) share price has fared very poorly over the last month, falling by a substantial 25%. For any long-term shareholders, the last month ends a year to forget by locking in a 52% share price decline.

In spite of the heavy fall in price, it's still not a stretch to say that Ubisoft Entertainment's price-to-sales (or "P/S") ratio of 0.6x right now seems quite "middle-of-the-road" compared to the Entertainment industry in France, where the median P/S ratio is around 1x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

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View our latest analysis for Ubisoft Entertainment

How Has Ubisoft Entertainment Performed Recently?

Ubisoft Entertainment certainly has been doing a good job lately as its revenue growth has been positive while most other companies have been seeing their revenue go backwards. Perhaps the market is expecting its current strong performance to taper off in accordance to the rest of the industry, which has kept the P/S contained. If not, then existing shareholders have reason to be feeling optimistic 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 Ubisoft Entertainment .

Is There Some Revenue Growth Forecasted For Ubisoft Entertainment?

The only time you'd be comfortable seeing a P/S like Ubisoft Entertainment's is when the company's growth is tracking the industry closely.

Retrospectively, the last year delivered a decent 11% gain to the company's revenues. Ultimately though, it couldn't turn around the poor performance of the prior period, with revenue shrinking 3.7% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Turning to the outlook, the next three years should generate growth of 2.2% per annum as estimated by the analysts watching the company. With the industry predicted to deliver 10% growth each year, the company is positioned for a weaker revenue result.

In light of this, it's curious that Ubisoft Entertainment's P/S sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

What Does Ubisoft Entertainment's P/S Mean For Investors?

Ubisoft Entertainment's plummeting stock price has brought its P/S back to a similar region as the rest of the industry. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Given that Ubisoft Entertainment's revenue growth projections are relatively subdued in comparison to the wider industry, it comes as a surprise to see it trading at its current P/S ratio. At present, we aren't confident in the P/S as the predicted future revenues aren't likely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Before you settle on your opinion, we've discovered 2 warning signs for Ubisoft Entertainment (1 makes us a bit uncomfortable!) that you should be aware of.

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.