What Enad Global 7 AB (publ)'s (STO:EG7) 27% Share Price Gain Is Not Telling You

Enad Global 7 AB (publ) (STO:EG7) shareholders would be excited to see that the share price has had a great month, posting a 27% gain and recovering from prior weakness. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 3.7% in the last twelve months.

Although its price has surged higher, there still wouldn't be many who think Enad Global 7's price-to-sales (or "P/S") ratio of 0.6x is worth a mention when the median P/S in Sweden's Entertainment industry is similar at about 0.7x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

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See our latest analysis for Enad Global 7

What Does Enad Global 7's Recent Performance Look Like?

With revenue growth that's inferior to most other companies of late, Enad Global 7 has been relatively sluggish. Perhaps the market is expecting future revenue performance to lift, which has kept the P/S from declining. 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 Enad Global 7 will help you uncover what's on the horizon.

How Is Enad Global 7's Revenue Growth Trending?

In order to justify its P/S ratio, Enad Global 7 would need to produce growth that's similar to the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 11% last year. Revenue has also lifted 22% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

Turning to the outlook, the next year should bring diminished returns, with revenue decreasing 9.7% as estimated by the one analyst watching the company. That's not great when the rest of the industry is expected to grow by 20%.

In light of this, it's somewhat alarming that Enad Global 7's P/S sits in line with the majority of other companies. 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 negative growth outlook.

The Key Takeaway

Enad Global 7's 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.

It appears that Enad Global 7 currently trades on a higher than expected P/S for a company whose revenues are forecast to decline. With this in mind, we don't feel the current P/S is justified as declining revenues are unlikely to support a more positive sentiment for long. If the declining revenues were to materialize in the form of a declining share price, shareholders will be feeling the pinch.

The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for Enad Global 7 with six simple checks will allow you to discover any risks that could be an issue.

If you're unsure about the strength of Enad Global 7's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.