Transmit Entertainment Limited (HKG:1326) Shares Fly 31% But Investors Aren't Buying For Growth

The Transmit Entertainment Limited (HKG:1326) share price has done very well over the last month, posting an excellent gain of 31%. Taking a wider view, although not as strong as the last month, the full year gain of 17% is also fairly reasonable.

Although its price has surged higher, Transmit Entertainment may still be sending bullish signals at the moment with its price-to-sales (or "P/S") ratio of 0.4x, since almost half of all companies in the Entertainment industry in Hong Kong have P/S ratios greater than 1.4x and even P/S higher than 4x are not unusual. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

We've discovered 4 warning signs about Transmit Entertainment. View them for free.

Check out our latest analysis for Transmit Entertainment

How Has Transmit Entertainment Performed Recently?

With revenue growth that's exceedingly strong of late, Transmit Entertainment has been doing very well. It might be that many expect the strong revenue performance to degrade substantially, which has repressed the P/S ratio. Those who are bullish on Transmit Entertainment will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

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

How Is Transmit Entertainment's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as low as Transmit Entertainment's is when the company's growth is on track to lag the industry.

Retrospectively, the last year delivered an exceptional 122% gain to the company's top line. Despite this strong recent growth, it's still struggling to catch up as its three-year revenue frustratingly shrank by 68% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenues over that time.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 13% shows it's an unpleasant look.

With this information, we are not surprised that Transmit Entertainment is trading at a P/S lower than the industry. However, we think shrinking revenues are unlikely to lead to a stable P/S over the longer term, which could set up shareholders for future disappointment. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

The Final Word

Transmit Entertainment's stock price has surged recently, but its but its P/S still remains modest. 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.

It's no surprise that Transmit Entertainment maintains its low P/S off the back of its sliding revenue over the medium-term. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Given the current circumstances, it seems unlikely that the share price will experience any significant movement in either direction in the near future if recent medium-term revenue trends persist.

Plus, you should also learn about these 4 warning signs we've spotted with Transmit Entertainment (including 3 which are concerning).

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.