Pinning Down Paradise Entertainment Limited's (HKG:1180) P/S Is Difficult Right Now

With a median price-to-sales (or "P/S") ratio of close to 0.7x in the Hospitality industry in Hong Kong, you could be forgiven for feeling indifferent about Paradise Entertainment Limited's (HKG:1180) P/S ratio of 0.6x. 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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See our latest analysis for Paradise Entertainment

How Paradise Entertainment Has Been Performing

Paradise Entertainment certainly has been doing a good job lately as it's been growing revenue more than most other companies. One possibility is that the P/S ratio is moderate because investors think this strong revenue performance might be about to tail off. 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 Paradise Entertainment.

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

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

Taking a look back first, we see that the company grew revenue by an impressive 44% last year. The latest three year period has also seen an excellent 180% overall rise in revenue, aided by its short-term performance. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Looking ahead now, revenue is anticipated to slump, contracting by 36% during the coming year according to the one analyst following the company. Meanwhile, the broader industry is forecast to expand by 13%, which paints a poor picture.

With this in consideration, we think it doesn't make sense that Paradise Entertainment's P/S is closely matching its industry peers. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock right now. Only the boldest would assume these prices are sustainable as these declining revenues are likely to weigh on the share price eventually.

The Bottom Line On Paradise Entertainment's P/S

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.

Our check of Paradise Entertainment's analyst forecasts revealed that its outlook for shrinking revenue isn't bringing down its P/S as much as we would have predicted. When we see a gloomy outlook like this, our immediate thoughts are that the share price is at risk of declining, negatively impacting P/S. If the poor revenue outlook tells us one thing, it's that these current price levels could be unsustainable.

Having said that, be aware Paradise Entertainment is showing 3 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable.

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.