What Embracer Group AB (publ)'s (STO:EMBRAC B) 25% Share Price Gain Is Not Telling You

Embracer Group AB (publ) (STO:EMBRAC B) shareholders have had their patience rewarded with a 25% share price jump in the last month. The last 30 days bring the annual gain to a very sharp 85%.

Since its price has surged higher, given close to half the companies operating in Sweden's Entertainment industry have price-to-sales ratios (or "P/S") below 0.8x, you may consider Embracer Group as a stock to potentially avoid with its 1.4x 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.

Check out our latest analysis for Embracer Group

How Has Embracer Group Performed Recently?

Recent times haven't been great for Embracer Group as its revenue has been falling quicker than most other companies. One possibility is that the P/S ratio is high because investors think the company will turn things around completely and accelerate past most others in the industry. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Keen to find out how analysts think Embracer Group's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Embracer Group's Revenue Growth Trending?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Embracer Group's 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 11%. However, a few very strong years before that means that it was still able to grow revenue by an impressive 209% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been more than adequate for the company.

Shifting to the future, estimates from the nine analysts covering the company suggest revenue should grow by 3.8% each year over the next three years. Meanwhile, the rest of the industry is forecast to expand by 4.7% per annum, which is not materially different.

With this information, we find it interesting that Embracer Group is trading at a high P/S compared to the industry. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as this level of revenue growth is likely to weigh down the share price eventually.

The Key Takeaway

The large bounce in Embracer Group's shares has lifted the company's P/S handsomely. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Analysts are forecasting Embracer Group's revenues to only grow on par with the rest of the industry, which has lead to the high P/S ratio being unexpected. The fact that the revenue figures aren't setting the world alight has us doubtful that the company's elevated P/S can be sustainable for the long term. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

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 Embracer Group with six simple checks.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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.