Why Investors Shouldn't Be Surprised By Pearl Abyss Corp.'s (KOSDAQ:263750) P/S

When you see that almost half of the companies in the Entertainment industry in Korea have price-to-sales ratios (or "P/S") below 1.8x, Pearl Abyss Corp. (KOSDAQ:263750) looks to be giving off strong sell signals with its 5.3x 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 so lofty.

View our latest analysis for Pearl Abyss

What Does Pearl Abyss' P/S Mean For Shareholders?

Pearl Abyss could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. Perhaps the market is expecting the poor revenue to reverse, justifying it's current high P/S.. 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 Pearl Abyss will help you uncover what's on the horizon.

How Is Pearl Abyss' Revenue Growth Trending?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Pearl Abyss' 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 12%. This means it has also seen a slide in revenue over the longer-term as revenue is down 30% 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.

Shifting to the future, estimates from the analysts covering the company suggest revenue should grow by 23% each year over the next three years. With the industry only predicted to deliver 13% per year, the company is positioned for a stronger revenue result.

With this information, we can see why Pearl Abyss 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.

The Bottom Line On Pearl Abyss' P/S

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.

Our look into Pearl Abyss shows that its P/S ratio remains high on the merit of its strong future revenues. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for Pearl Abyss with six simple checks on some of these key factors.

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.