BAIOO Family Interactive Limited's (HKG:2100) 27% Share Price Surge Not Quite Adding Up

BAIOO Family Interactive Limited (HKG:2100) shareholders would be excited to see that the share price has had a great month, posting a 27% gain and recovering from prior weakness. The last month tops off a massive increase of 139% in the last year.

Since its price has surged higher, when almost half of the companies in Hong Kong's Entertainment industry have price-to-sales ratios (or "P/S") below 1.9x, you may consider BAIOO Family Interactive as a stock probably not worth researching with its 2.7x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

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See our latest analysis for BAIOO Family Interactive

What Does BAIOO Family Interactive's Recent Performance Look Like?

As an illustration, revenue has deteriorated at BAIOO Family Interactive over the last year, which is not ideal at all. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on BAIOO Family Interactive's earnings, revenue and cash flow.

Do Revenue Forecasts Match The High P/S Ratio?

BAIOO Family Interactive's P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

Retrospectively, the last year delivered a frustrating 30% 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 38% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

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 BAIOO Family Interactive is trading at a P/S higher than 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. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

The Final Word

The large bounce in BAIOO Family Interactive's shares has lifted the company's P/S handsomely. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of BAIOO Family Interactive revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

Before you settle on your opinion, we've discovered 1 warning sign for BAIOO Family Interactive that you should be aware of.

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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.