It's Down 27% But mm2 Asia Ltd. (SGX:1B0) Could Be Riskier Than It Looks

The mm2 Asia Ltd. (SGX:1B0) share price has fared very poorly over the last month, falling by a substantial 27%. For any long-term shareholders, the last month ends a year to forget by locking in a 50% share price decline.

After such a large drop in price, considering around half the companies operating in Singapore's Entertainment industry have price-to-sales ratios (or "P/S") above 2.2x, you may consider mm2 Asia as an solid investment opportunity with its 0.4x 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 limited.

Check out our latest analysis for mm2 Asia

How mm2 Asia Has Been Performing

With revenue growth that's exceedingly strong of late, mm2 Asia has been doing very well. Perhaps the market is expecting future revenue performance to dwindle, which has kept the P/S suppressed. Those who are bullish on mm2 Asia will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

Although there are no analyst estimates available for mm2 Asia, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is mm2 Asia's Revenue Growth Trending?

There's an inherent assumption that a company should underperform the industry for P/S ratios like mm2 Asia's to be considered reasonable.

Taking a look back first, we see that the company grew revenue by an impressive 135% last year. The strong recent performance means it was also able to grow revenue by 52% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 14% growth in the next 12 months, the company's momentum is pretty similar based on recent medium-term annualised revenue results.

With this information, we find it odd that mm2 Asia is trading at a P/S lower than the industry. It may be that most investors are not convinced the company can maintain recent growth rates.

What Does mm2 Asia's P/S Mean For Investors?

mm2 Asia's recently weak share price has pulled its P/S back below other Entertainment companies. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

The fact that mm2 Asia currently trades at a low P/S relative to the industry is unexpected considering its recent three-year growth is in line with the wider industry forecast. There could be some unobserved threats to revenue preventing the P/S ratio from matching the company's performance. revenue trends suggest that the risk of a price decline is low, investors appear to perceive a possibility of revenue volatility in the future.

We don't want to rain on the parade too much, but we did also find 4 warning signs for mm2 Asia (1 is potentially serious!) that you need to be mindful of.

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).

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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.