Benign Growth For Ateam Inc. (TSE:3662) Underpins Stock's 30% Plummet

Ateam Inc. (TSE:3662) shares have had a horrible month, losing 30% after a relatively good period beforehand. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 22% in that time.

In spite of the heavy fall in price, when close to half the companies operating in Japan's Entertainment industry have price-to-sales ratios (or "P/S") above 1.3x, you may still consider Ateam as an enticing stock to check out with its 0.4x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

Check out our latest analysis for Ateam

What Does Ateam's P/S Mean For Shareholders?

For instance, Ateam's receding revenue in recent times would have to be some food for thought. It might be that many expect the disappointing revenue performance to continue or accelerate, which has repressed the P/S. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

Although there are no analyst estimates available for Ateam, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Do Revenue Forecasts Match The Low P/S Ratio?

Ateam's P/S ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the industry.

Retrospectively, the last year delivered a frustrating 17% 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 21% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for a contraction of 2.2% shows the industry is more attractive on an annualised basis regardless.

With this information, it's not too hard to see why Ateam is trading at a lower P/S in comparison. However, when revenue shrink rapidly P/S often shrinks too, which could set up shareholders for future disappointment regardless. Even just maintaining these prices will be difficult to achieve as recent revenue trends are already weighing down the shares heavily.

The Key Takeaway

Ateam's recently weak share price has pulled its P/S back below other Entertainment companies. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Ateam revealed its sharp three-year contraction in revenue is contributing to its low P/S, given the industry is set to shrink less severely. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Although, we would be concerned whether the company can even maintain its medium-term level of performance under these tough industry conditions. In the meantime, unless the company's relative performance improves, the share price will hit a barrier around these levels.

Having said that, be aware Ateam is showing 4 warning signs in our investment analysis, and 1 of those shouldn't be ignored.

If these risks are making you reconsider your opinion on Ateam, explore our interactive list of high quality stocks to get an idea of what else is out there.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com