Subdued growth no obstacle to the share price of Ubisoft Entertainment SA (EPA:UBI)

There are not many who think Ubisoft Entertainment SA's (EPA:UBI) The price-to-sales (or “P/S”) ratio of 1x is worth noting when the median P/S for the entertainment industry in France is similarly high, at around 0.9x. While that may not be surprising, if the P/S ratio is not justified, investors could be missing out on a potential opportunity or ignoring an impending disappointment.

Check out our latest analysis for Ubisoft Entertainment

What is Ubisoft Entertainment’s recent performance?

With revenue growth in positive territory compared to the declining revenues of most other companies, Ubisoft Entertainment has done quite well recently. It could be that many are expecting the strong revenue performance to deteriorate like the others, which has prevented the P/S ratio from increasing. If not, then existing shareholders have reason to be optimistic about the future direction of the share price.

Would you like to know how analysts assess the future of Ubisoft Entertainment compared to the industry? In this case, our free Report is a good starting point.

Is revenue growth forecast for Ubisoft Entertainment?

Ubisoft Entertainment's price-to-sales ratio is typical of a company that is expected to deliver only moderate growth and, importantly, industry-standard performance.

Looking back, last year saw the company achieve an exceptional 27% increase in revenue. However, the performance has not been as strong over the long term, with overall revenue growth over three years being relatively low. Therefore, it seems to us that the company has had a mixed performance in terms of revenue growth during this period.

As for the outlook, the company is expected to grow at a rate of 5.3% per year over the next three years, according to estimates by analysts covering the company. The rest of the industry, on the other hand, is forecast to grow at a rate of 9.1% per year, which is much more attractive.

Given this information, we find it interesting that Ubisoft Entertainment trades at a fairly similar price-to-earnings ratio compared to the industry. It seems that most investors ignore the fairly limited growth expectations and are willing to pay more to own the stock. These shareholders could be setting themselves up for future disappointment if the price-to-earnings ratio falls to a level more in line with the growth prospects.

The last word

It's not a good idea to use the price-to-sales ratio alone to decide whether to sell your stock, but it can be a useful guide to the company's future prospects.

Given that Ubisoft Entertainment's revenue growth forecasts are relatively muted compared to the wider industry, it's surprising that the company is trading at its current P/S ratio. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price could decline, driving down the modest P/S. This puts shareholders' investments at risk and potential investors risk paying an unnecessary premium.

Please note, however, Ubisoft Entertainment shows 3 warning signals in our investment analysis, and one of them we don't like very much.

Naturally, Profitable companies with a history of strong earnings growth are generally safer bets. You may want to see this free Collection of other companies that have reasonable P/E ratios and strong earnings growth.

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This Simply Wall St article is of a general nature. We comment solely on the basis of historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.