Linmon Media Limited (HKG:9857) shares have retraced a considerable 25% in the last month, reversing a fair amount of their solid recent performance. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 36% share price drop.

In spite of the heavy fall in price, you could still be forgiven for feeling indifferent about Linmon Media's P/S ratio of 1.9x, since the median price-to-sales (or "P/S") ratio for the Entertainment industry in Hong Kong is about the same. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

How Linmon Media Has Been Performing

Linmon Media could be doing better as it's been growing revenue less than most other companies lately. Perhaps the market is expecting future revenue performance to lift, which has kept the P/S from declining. However, if this isn't the case, investors might get caught out paying too much for the stock.

How Is Linmon Media's Revenue Growth Trending?

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

Retrospectively, the last year delivered an exceptional 28% gain to the company's top line. Still, revenue has fallen 14% in total from three years ago, which is quite disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenues over that time.

Looking ahead now, revenue is anticipated to climb by 15% during the coming year according to the lone analyst following the company. With the industry predicted to deliver 20% growth, the company is positioned for a weaker revenue result.

With this information, we find it interesting that Linmon Media is trading at a fairly similar P/S compared to the industry. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Bottom Line On Linmon Media's P/S

Linmon Media's plummeting stock price has brought its P/S back to a similar region as the rest of the industry. 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.

When you consider that Linmon Media's revenue growth estimates are fairly muted compared to the broader industry, it's easy to see why we consider it unexpected to be 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 is at risk of declining, sending the moderate P/S lower. A positive change is needed in order to justify the current price-to-sales ratio.

Before you settle on your opinion, we've discovered 1 warning sign for Linmon Media that you should be aware of.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.

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