Life Intelligent Enterprise Holdings Co.,Ltd.'s (TSE:5856) Popularity With Investors Under Threat As Stock Sinks 26%

Life Intelligent Enterprise Holdings Co.,Ltd. (TSE:5856) shareholders that were waiting for something to happen have been dealt a blow with a 26% share price drop in the last month. Still, a bad month hasn't completely ruined the past year with the stock gaining 28%, which is great even in a bull market.

Even after such a large drop in price, there still wouldn't be many who think Life Intelligent Enterprise HoldingsLtd's price-to-sales (or "P/S") ratio of 0.5x is worth a mention when the median P/S in Japan's Consumer Retailing industry is similar at about 0.3x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

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Check out our latest analysis for Life Intelligent Enterprise HoldingsLtd

What Does Life Intelligent Enterprise HoldingsLtd's P/S Mean For Shareholders?

As an illustration, revenue has deteriorated at Life Intelligent Enterprise HoldingsLtd over the last year, which is not ideal at all. Perhaps investors believe the recent revenue performance is enough to keep in line with the industry, which is keeping the P/S from dropping off. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

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

In order to justify its P/S ratio, Life Intelligent Enterprise HoldingsLtd would need to produce growth that's similar to the industry.

Retrospectively, the last year delivered a frustrating 61% decrease to the company's top line. As a result, revenue from three years ago have also fallen 53% overall. 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 5.3% shows it's an unpleasant look.

With this in mind, we find it worrying that Life Intelligent Enterprise HoldingsLtd's P/S exceeds that of its industry peers. 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 on the share price eventually.

What We Can Learn From Life Intelligent Enterprise HoldingsLtd's P/S?

With its share price dropping off a cliff, the P/S for Life Intelligent Enterprise HoldingsLtd looks to be in line with the rest of the Consumer Retailing industry. 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.

We find it unexpected that Life Intelligent Enterprise HoldingsLtd trades at a P/S ratio that is comparable to the rest of the industry, despite experiencing declining revenues during the medium-term, while the industry as a whole is expected 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.

You should always think about risks. Case in point, we've spotted 4 warning signs for Life Intelligent Enterprise HoldingsLtd you should be aware of, and 2 of them are potentially serious.

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.