YH Entertainment Group (HKG:2306) shares are lagging behind the industry, but so is its business

The (HKG:2306) A price-to-sales (or “P/S”) ratio of 0.5x can seem like quite an attractive investment opportunity considering that almost half of the entertainment companies in Hong Kong have a P/S ratio of over 1.4x. However, it is not wise to simply take the P/S at face value as there may be an explanation as to why it is capped.

Check out our latest analysis for YH Entertainment Group

What does YH Entertainment Group’s P/S mean for shareholders?

For example, YH Entertainment Group's declining revenues recently should give cause for concern. One possibility is that the P/S is low because investors believe the company won't do enough to avoid underperforming the industry as a whole in the near future. If you like the company, you'd hope that doesn't happen so you can potentially buy some shares while it's out of demand.

Do you want a complete overview of the company's profit, sales and cash flow? Then free The report on YH Entertainment Group will help you shed light on its historical performance.

Do the sales forecasts match the low P/S ratio?

YH Entertainment Group's P/S ratio would be typical of a company that is expected to have limited growth and, more importantly, is underperforming the industry.

First, if we look back, the company's revenue growth last year wasn't exactly exciting as it posted a disappointing 23% decline. This means that there has been a long-term decline in revenue as well, with revenue declining by 18% overall over the last three years. So, unfortunately, we have to admit that the company hasn't done a great job of growing revenue during this time.

If you compare this medium-term sales development with the one-year forecast for the entire industry, which assumes growth of 22%, this is not a good prospect.

With this in mind, it is understandable that YH Entertainment Group's price-to-earnings ratio is lower than most other companies. However, we believe that declining revenues are unlikely to result in a stable price-to-earnings ratio over the long term, which could disappoint shareholders in the future. Even maintaining these prices could be difficult, with recent revenue trends already weighing on shares.

The most important things to take away

In general, we prefer to use the price-to-sales ratio only when we want to determine what the market thinks about the overall health of a company.

Our research into YH Entertainment Group confirms that the company's declining revenues over the medium term are a key factor in the low price-to-sales ratio, given that the industry is forecast to grow. For now, shareholders are accepting the low price-to-sales ratio, as they admit that future revenues are unlikely to offer pleasant surprises either. Under these circumstances, if recent medium-term revenue trends continue, it is difficult to imagine the share price moving much in one direction or the other in the near future.

Please note, however, YH Entertainment Group shows 1 warning signal in our investment analysis what you should know.

If you uncertain about the strength of YH Entertainment Group’s businesswhy not explore our interactive stock list with solid business fundamentals for some other companies you may have missed.

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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.