With A 28% Price Drop For Archosaur Games Inc. (HKG:9990) You'll Still Get What You Pay For

Archosaur Games Inc. (HKG:9990) shareholders won't be pleased to see that the share price has had a very rough month, dropping 28% and undoing the prior period's positive performance. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 18% in that time.

Although its price has dipped substantially, you could still be forgiven for thinking Archosaur Games is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 4.5x, considering almost half the companies in Hong Kong's Entertainment industry have P/S ratios below 1.7x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Archosaur Games

What Does Archosaur Games' P/S Mean For Shareholders?

With revenue that's retreating more than the industry's average of late, Archosaur Games has been very sluggish. It might be that many expect the dismal revenue performance to recover substantially, which has kept the P/S from collapsing. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

Is There Enough Revenue Growth Forecasted For Archosaur Games?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Archosaur Games' to be considered reasonable.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 37%. The last three years don't look nice either as the company has shrunk revenue by 45% in aggregate. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Looking ahead now, revenue is anticipated to climb by 193% during the coming year according to the dual analysts following the company. That's shaping up to be materially higher than the 51% growth forecast for the broader industry.

With this information, we can see why Archosaur Games is trading at such a high P/S compared to the industry. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What Does Archosaur Games' P/S Mean For Investors?

Even after such a strong price drop, Archosaur Games' P/S still exceeds the industry median significantly. 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.

As we suspected, our examination of Archosaur Games' analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for Archosaur Games with six simple checks will allow you to discover any risks that could be an issue.

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.