There's Reason For Concern Over Entain Plc's (LON:ENT) Price

There wouldn't be many who think Entain Plc's (LON:ENT) price-to-sales (or "P/S") ratio of 1.4x is worth a mention when the median P/S for the Hospitality industry in the United Kingdom is similar at about 1x. 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.

View our latest analysis for Entain

How Has Entain Performed Recently?

Entain could be doing better as it's been growing revenue less than most other companies lately. One possibility is that the P/S ratio is moderate because investors think this lacklustre 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.

Want the full picture on analyst estimates for the company? Then our free report on Entain will help you uncover what's on the horizon.

How Is Entain's Revenue Growth Trending?

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

Retrospectively, the last year delivered a decent 10% gain to the company's revenues. This was backed up an excellent period prior to see revenue up by 36% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Looking ahead now, revenue is anticipated to climb by 5.6% per annum during the coming three years according to the analysts following the company. That's shaping up to be materially lower than the 8.3% per year growth forecast for the broader industry.

With this in mind, we find it intriguing that Entain's P/S is closely matching its industry peers. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

What We Can Learn From Entain's P/S?

Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our look at the analysts forecasts of Entain's revenue prospects has shown that its inferior revenue outlook isn't negatively impacting its P/S as much as we would have predicted. 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.

Plus, you should also learn about this 1 warning sign we've spotted with Entain.

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).

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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.