mm2 Asia Ltd. (SGX:1B0) Not Doing Enough For Some Investors As Its Shares Slump 40%

The mm2 Asia Ltd. (SGX:1B0) share price has fared very poorly over the last month, falling by a substantial 40%. For any long-term shareholders, the last month ends a year to forget by locking in a 74% share price decline.

Since its price has dipped substantially, given close to half the companies in Singapore's Entertainment industry have price-to-sales ratios (or "P/S") above 2.3x, you may consider mm2 Asia as a highly attractive investment with its 0.2x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/S.

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Check out our latest analysis for mm2 Asia

How mm2 Asia Has Been Performing

As an illustration, revenue has deteriorated at mm2 Asia over the last year, which is not ideal at all. It might be that many expect the disappointing revenue performance to continue or accelerate, which has repressed the P/S. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on mm2 Asia's earnings, revenue and cash flow.

How Is mm2 Asia's Revenue Growth Trending?

In order to justify its P/S ratio, mm2 Asia would need to produce anemic growth that's substantially trailing the industry.

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 25%. Even so, admirably revenue has lifted 55% in aggregate from three years ago, notwithstanding the last 12 months. 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.

This is in contrast to the rest of the industry, which is expected to grow by 21% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's understandable that mm2 Asia's P/S sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the wider industry.

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

Shares in mm2 Asia have plummeted and its P/S has followed suit. 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 examination of mm2 Asia confirms that the company's revenue trends over the past three-year years are a key factor in its low price-to-sales ratio, as we suspected, given they fall short of current industry expectations. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Having said that, be aware mm2 Asia is showing 3 warning signs in our investment analysis, and 2 of those are significant.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.