Why Investors Shouldn't Be Surprised By Mobcast Holdings Inc.'s (TSE:3664) 32% Share Price Plunge

The Mobcast Holdings Inc. (TSE:3664) share price has fared very poorly over the last month, falling by a substantial 32%. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 57% loss during that time.

After such a large drop in price, it would be understandable if you think Mobcast Holdings is a stock with good investment prospects with a price-to-sales ratios (or "P/S") of 0.5x, considering almost half the companies in Japan's Entertainment industry have P/S ratios above 1.3x. 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 Mobcast Holdings

How Mobcast Holdings Has Been Performing

As an illustration, revenue has deteriorated at Mobcast Holdings over the last year, which is not ideal at all. One possibility is that the P/S is low because investors think the company won't do enough to avoid underperforming the broader industry in the near future. 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 Mobcast Holdings, 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?

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

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 5.6%. This means it has also seen a slide in revenue over the longer-term as revenue is down 42% 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 a contraction of 2.2% shows the industry is more attractive on an annualised basis regardless.

In light of this, it's understandable that Mobcast Holdings' P/S sits below the majority of other companies. However, when revenue shrink rapidly P/S often shrinks too, which could set up shareholders for future disappointment regardless. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth, which would be difficult to do with the current industry outlook.

What We Can Learn From Mobcast Holdings' P/S?

Mobcast Holdings' P/S has taken a dip along with its share price. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

It's clear that Mobcast Holdings trades at a low P/S relative to the wider industry on the weakness of its recent three-year revenue being even worse than the forecasts for a struggling industry, as expected. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. Although, we would be concerned whether the company can even maintain its medium-term level of performance under these tough industry conditions. For now though, it's hard to see the share price rising strongly in the near future under these circumstances.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Mobcast Holdings (1 makes us a bit uncomfortable!) that you need to be mindful of.

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.

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