YG Entertainment Inc. (KOSDAQ:122870) Shares May Have Slumped 30% But Getting In Cheap Is Still Unlikely

To the annoyance of some shareholders, YG Entertainment Inc. (KOSDAQ:122870) shares are down a considerable 30% in the last month, which continues a horrid run for the company. Looking at the bigger picture, even after this poor month the stock is up 29% in the last year.

Even after such a large drop in price, when almost half of the companies in Korea's Entertainment industry have price-to-sales ratios (or "P/S") below 1.7x, you may still consider YG Entertainment as a stock probably not worth researching with its 2.5x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

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See our latest analysis for YG Entertainment

What Does YG Entertainment's P/S Mean For Shareholders?

Recent times have been advantageous for YG Entertainment as its revenues have been rising faster than most other companies. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. If not, then existing shareholders might be a little nervous about the viability of the share price.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on YG Entertainment.

How Is YG Entertainment's Revenue Growth Trending?

YG Entertainment'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 an exceptional 29% gain to the company's top line. The strong recent performance means it was also able to grow revenue by 49% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenue over that time.

Shifting to the future, estimates from the analysts covering the company suggest revenue should grow by 7.7% each year over the next three years. Meanwhile, the rest of the industry is forecast to expand by 11% each year, which is noticeably more attractive.

With this in consideration, we believe it doesn't make sense that YG Entertainment's P/S is outpacing its industry peers. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

What Does YG Entertainment's P/S Mean For Investors?

Despite the recent share price weakness, YG Entertainment's P/S remains higher than most other companies in the industry. 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.

Despite analysts forecasting some poorer-than-industry revenue growth figures for YG Entertainment, this doesn't appear to be impacting the P/S in the slightest. Right now we aren't comfortable with the high P/S as the predicted future revenues aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Many other vital risk factors can be found on the company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for YG Entertainment with six simple checks.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.