Revenues Not Telling The Story For 11 bit studios S.A. (WSE:11B) After Shares Rise 30%

11 bit studios S.A. (WSE:11B) shareholders are no doubt pleased to see that the share price has bounced 30% in the last month, although it is still struggling to make up recently lost ground. But the last month did very little to improve the 64% share price decline over the last year.

In spite of the firm bounce in price, there still wouldn't be many who think 11 bit studios' price-to-sales (or "P/S") ratio of 4.3x is worth a mention when the median P/S in Poland's Entertainment industry is similar at about 3.6x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

See our latest analysis for 11 bit studios

How Has 11 bit studios Performed Recently?

With revenue growth that's superior to most other companies of late, 11 bit studios has been doing relatively well. It might be that many expect the strong revenue performance to wane, which has kept the P/S ratio from rising. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

Want the full picture on analyst estimates for the company? Then our free report on 11 bit studios will help you uncover what's on the horizon.

Do Revenue Forecasts Match The P/S Ratio?

In order to justify its P/S ratio, 11 bit studios would need to produce growth that's similar to the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 155%. Pleasingly, revenue has also lifted 83% in aggregate from three years ago, thanks to the last 12 months of growth. 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 seven analysts covering the company suggest revenue should grow by 4.7% per annum over the next three years. That's shaping up to be materially lower than the 33% per annum growth forecast for the broader industry.

With this information, we find it interesting that 11 bit studios is trading at a fairly similar P/S compared to the industry. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Bottom Line On 11 bit studios' P/S

11 bit studios' stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our look at the analysts forecasts of 11 bit studios' revenue prospects has shown that its inferior revenue outlook isn't negatively impacting its P/S as much as we would have predicted. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. Circumstances like this present a risk to current and prospective investors who may see share prices fall if the low revenue growth impacts the sentiment.

And what about other risks? Every company has them, and we've spotted 3 warning signs for 11 bit studios you should know about.

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.

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.