Unfortunately for some shareholders, the Kiddieland International Limited (HKG:3830) share price has dived 26% in the last thirty days, prolonging recent pain. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 40% share price drop.

Although its price has dipped substantially, you could still be forgiven for feeling indifferent about Kiddieland International's P/S ratio of 0.1x, since the median price-to-sales (or "P/S") ratio for the Leisure industry in Hong Kong is also close to 0.5x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

How Kiddieland International Has Been Performing

It looks like revenue growth has deserted Kiddieland International recently, which is not something to boast about. One possibility is that the P/S is moderate because investors think this benign revenue growth rate might not be enough to outperform the broader industry in the near future. If not, then existing shareholders may be feeling hopeful about the future direction of the share price.

Do Revenue Forecasts Match The P/S Ratio?

The only time you'd be comfortable seeing a P/S like Kiddieland International's is when the company's growth is tracking the industry closely.

Taking a look back first, we see that there was hardly any revenue growth to speak of for the company over the past year. The lack of growth did nothing to help the company's aggregate three-year performance, which is an unsavory 29% drop in revenue. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Comparing that to the industry, which is predicted to deliver 4.1% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this in mind, we find it worrying that Kiddieland International's P/S exceeds that of its industry peers. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. There's a 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 Final Word

Kiddieland International's plummeting stock price has brought its P/S back to a similar region as the rest of the industry. 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 look at Kiddieland International revealed its shrinking revenues over the medium-term haven't impacted the P/S as much as we anticipated, given the industry is set to grow. Even though it matches the industry, we're uncomfortable with the current P/S ratio, as this dismal revenue performance is unlikely to support a more positive sentiment for long. If recent medium-term revenue trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

You should always think about risks. Case in point, we've spotted 3 warning signs for Kiddieland International you should be aware of, and 2 of them shouldn't be ignored.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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.