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When close to half the companies in the Entertainment industry in Germany have price-to-sales ratios (or "P/S") below 0.8x, you may consider Beyond Frames Entertainment AB (publ) (FRA:8WP) as a stock to avoid entirely with its 2.8x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.
See our latest analysis for Beyond Frames Entertainment
How Beyond Frames Entertainment Has Been Performing
Beyond Frames Entertainment certainly has been doing a good job lately as it's been growing revenue more than most other companies. The P/S is probably high because investors think this strong revenue performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.
Keen to find out how analysts think Beyond Frames Entertainment's future stacks up against the industry? In that case, our free report is a great place to start.
Do Revenue Forecasts Match The High P/S Ratio?
The only time you'd be truly comfortable seeing a P/S as steep as Beyond Frames Entertainment's is when the company's growth is on track to outshine the industry decidedly.
If we review the last year of revenue growth, the company posted a terrific increase of 139%. The latest three year period has also seen an incredible overall rise in revenue, aided by its incredible short-term performance. Therefore, it's fair to say the revenue growth recently has been superb for the company.
Turning to the outlook, the next year should bring plunging returns, with revenue decreasing 4.7% as estimated by the sole analyst watching the company. The industry is also set to see revenue decline 0.8% but the stock is shaping up to perform materially worse.
With this in mind, we find it intriguing that Beyond Frames Entertainment's P/S exceeds that of its industry peers. When revenue shrink rapidly often the P/S premium shrinks too, which could set up shareholders for future disappointment. There's strong potential for the P/S to fall to lower levels if the company doesn't improve its top-line growth.
The Final Word
We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
We've established that Beyond Frames Entertainment currently trades on a much higher than expected P/S since its revenue forecast is even worse than the struggling industry. Revenue outlooks like this don't typically support a company trading at such an elevated P/S, and if it did, it doesn't usually do it for long. In addition, we would be concerned whether the company's revenue prospects could slide further under these tough industry conditions. Unless the company's prospects improve markedly, it's going to be challenging to resist the P/S dropping to a more justifiable level.