Emperor Culture Group Limited (HKG:491) shareholders that were waiting for something to happen have been dealt a blow with a 29% share price drop in the last month.    The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 21% in that time.  

Following the heavy fall in price, Emperor Culture Group's price-to-sales (or "P/S") ratio of 0.2x might make it look like a buy right now compared to the Entertainment industry in Hong Kong, where around half of the companies have P/S ratios above 1.6x and even P/S above 4x are quite common.   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 Emperor Culture Group

SEHK:491 Price to Sales Ratio vs Industry January 30th 2024

How Has Emperor Culture Group Performed Recently?

Recent times have been quite advantageous for Emperor Culture Group as its revenue has been rising very briskly.   One possibility is that the P/S ratio is low because investors think this strong revenue growth might actually underperform the broader industry in the near future.  Those who are bullish on Emperor Culture Group will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.    

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 Emperor Culture Group's earnings, revenue and cash flow.  

How Is Emperor Culture Group's Revenue Growth Trending?  

Emperor Culture Group's P/S ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the industry.  

If we review the last year of revenue growth, the company posted a terrific increase of 49%.   Pleasingly, revenue has also lifted 261% in aggregate from three years ago, thanks to the last 12 months of growth.  Therefore, it's fair to say the revenue growth recently has been superb for the company.  

Comparing that to the industry, which is only predicted to deliver 45% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised revenue results.

With this information, we find it odd that Emperor Culture Group is trading at a P/S lower than the industry.  It looks like most investors are not convinced the company can maintain its recent growth rates.  

The Key Takeaway

The southerly movements of Emperor Culture Group's shares means its P/S is now sitting at a pretty low level.      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.

We're very surprised to see Emperor Culture Group currently trading on a much lower than expected P/S since its recent three-year growth is higher than the wider industry forecast.  When we see robust revenue growth that outpaces the industry, we presume that there are notable underlying risks to the company's future performance, which is exerting downward pressure on the P/S ratio.  It appears many are indeed anticipating revenue instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.    

Don't forget that there may be other risks. For instance, we've identified 4 warning signs for Emperor Culture Group  (2 don't sit too well with us) you should be aware of.  

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.