Investors are not buying the sales of Strawbear Entertainment Group (HKG:2125)

Considering that nearly half of Hong Kong’s entertainment companies have a price-to-sales ratio (or “P/S”) of over 1.4x, Strawbear Entertainment Group (HKG:2125) seems to be giving off some buy signals with its 0.3x P/S ratio. However, it is not advisable to simply take the P/S at face value as there might be an explanation as to why it is capped.

Check out our latest analysis for Strawbear Entertainment Group

This is how the Strawbear Entertainment Group performed

Strawbear Entertainment Group's revenue has increased significantly recently, which is encouraging. Perhaps the market is expecting a collapse in this acceptable revenue trend that has kept the price-earnings ratio low. If that does not happen, existing shareholders have reason to be optimistic about the future development of the share price.

Although there are no analyst estimates for Strawbear Entertainment Group, take a look at these free Data-rich visualization to see how the company is performing in terms of profit, revenue and cash flow.

What do the revenue growth metrics tell us about the low P/S?

A P/S ratio as low as that of Strawbear Entertainment Group would only be truly comfortable if the company's growth lagged behind that of the industry.

If we look at the revenue growth over the last year, the company saw a fantastic increase of 25%. However, this was not enough as the company suffered a terrible 9.1% decline in revenue over the last three-year period overall. So, we must admit that the company has not done a particularly good job of increasing 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.

Given this information, we are not surprised to see Strawbear Entertainment Group trading at a lower P/E than the industry. Still, there is no guarantee that the P/E has already bottomed out as revenues are declining. There is a possibility that the P/E could fall to even lower levels if the company fails to improve its revenue growth.

The most important things to take away

We usually caution against reading too much into the price-to-sales ratio when making investment decisions, even though it can say a lot about what other market participants think about the company.

Our research into Strawbear Entertainment Group confirms that the company's declining revenues over the medium term are a key factor in its low price-to-sales ratio, given that the industry is forecast to grow. At this point, investors believe that the potential for revenue growth is not large enough to justify a higher price-to-sales ratio. 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.

Before you take the next step, you should know about the 2 warning signs for Strawbear Entertainment Group (1 is potentially serious!) that we have uncovered.

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.

Do you have feedback on this article? Are you concerned about the content? Contact us directly from us. Alternatively, send an email to editorial-team (at) simplywallst.com.

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.