Kuke Music Holding Limited's (NYSE:KUKE) 39% Share Price Plunge Could Signal Some Risk

Kuke Music Holding Limited (NYSE:KUKE) shareholders that were waiting for something to happen have been dealt a blow with a 39% share price drop in the last month. For any long-term shareholders, the last month ends a year to forget by locking in a 90% share price decline.

Although its price has dipped substantially, when almost half of the companies in the United States' Entertainment industry have price-to-sales ratios (or "P/S") below 1.1x, you may still consider Kuke Music Holding as a stock not worth researching with its 7.7x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

View our latest analysis for Kuke Music Holding

How Kuke Music Holding Has Been Performing

Revenue has risen firmly for Kuke Music Holding recently, which is pleasing to see. It might be that many expect the respectable revenue performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders may be a little nervous about the viability of the share price.

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

How Is Kuke Music Holding's Revenue Growth Trending?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Kuke Music Holding's to be considered reasonable.

Taking a look back first, we see that the company managed to grow revenues by a handy 10% last year. However, this wasn't enough as the latest three year period has seen an unpleasant 56% overall drop in revenue. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

In contrast to the company, the rest of the industry is expected to grow by 15% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this in mind, we find it worrying that Kuke Music Holding's P/S exceeds that of its industry peers. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

The Bottom Line On Kuke Music Holding's P/S

Even after such a strong price drop, Kuke Music Holding's P/S still exceeds the industry median significantly. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Our examination of Kuke Music Holding revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

Before you take the next step, you should know about the 4 warning signs for Kuke Music Holding (2 are significant!) that we have uncovered.

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.