Universe Entertainment and Culture Group Company Limited's (HKG:1046) 33% Price Boost Is Out Of Tune With Revenues

Universe Entertainment and Culture Group Company Limited (HKG:1046) shareholders would be excited to see that the share price has had a great month, posting a 33% gain and recovering from prior weakness. Looking back a bit further, it's encouraging to see the stock is up 28% in the last year.

In spite of the firm bounce in price, you could still be forgiven for feeling indifferent about Universe Entertainment and Culture Group's P/S ratio of 1.5x, since the median price-to-sales (or "P/S") ratio for the Entertainment industry in Hong Kong is also close to 1.8x. 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.

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See our latest analysis for Universe Entertainment and Culture Group

What Does Universe Entertainment and Culture Group's P/S Mean For Shareholders?

For example, consider that Universe Entertainment and Culture Group's financial performance has been poor lately as its revenue has been in decline. It might be that many expect the company to put the disappointing revenue performance behind them over the coming period, which has kept the P/S from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Universe Entertainment and Culture Group will help you shine a light on its historical performance.

Do Revenue Forecasts Match The P/S Ratio?

Universe Entertainment and Culture Group's P/S ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the industry.

Retrospectively, the last year delivered a frustrating 31% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 23% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 12% shows it's an unpleasant look.

With this information, we find it concerning that Universe Entertainment and Culture Group is trading at a fairly similar P/S compared to the industry. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

The Key Takeaway

Universe Entertainment and Culture Group appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry 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.

Our look at Universe Entertainment and Culture Group revealed its shrinking revenues over the medium-term haven't impacted the P/S as much as we anticipated, given the industry is set to grow. Even though it matches the industry, we're uncomfortable with the current P/S ratio, as this dismal revenue performance is unlikely to support a more positive sentiment for long. If recent medium-term revenue trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

And what about other risks? Every company has them, and we've spotted 4 warning signs for Universe Entertainment and Culture Group (of which 3 are a bit concerning!) you should know about.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.