Linekong Interactive Group Co., Ltd. (HKG:8267) shareholders have had their patience rewarded with a 36% share price jump in the last month. Looking back a bit further, it's encouraging to see the stock is up 98% in the last year.

Although its price has surged higher, it's still not a stretch to say that Linekong Interactive Group's price-to-sales (or "P/S") ratio of 1.5x right now seems quite "middle-of-the-road" compared to the Entertainment industry in Hong Kong, seeing as it matches the P/S ratio of the wider industry. 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.

What Does Linekong Interactive Group's P/S Mean For Shareholders?

As an illustration, revenue has deteriorated at Linekong Interactive Group over the last year, which is not ideal at all. It might be that many expect the company to put the disappointing revenue performance behind them over the coming period, which has kept the P/S from falling. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

Do Revenue Forecasts Match The P/S Ratio?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Linekong Interactive Group's to be considered reasonable.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 27%. The last three years don't look nice either as the company has shrunk revenue by 38% in aggregate. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 13% shows it's an unpleasant look.

With this in mind, we find it worrying that Linekong Interactive Group's P/S exceeds that of its industry peers. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh on the share price eventually.

The Bottom Line On Linekong Interactive Group's P/S

Linekong Interactive Group's stock has a lot of momentum behind it lately, which has brought its P/S level with 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.

We find it unexpected that Linekong Interactive Group trades at a P/S ratio that is comparable to the rest of the industry, despite experiencing declining revenues during the medium-term, while the industry as a whole is expected to grow. Even though it matches the industry, we're uncomfortable with the current P/S ratio, as this dismal revenue performance is unlikely to support a more positive sentiment for long. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

You always need to take note of risks, for example - Linekong Interactive Group has 2 warning signs we think you should be aware of.

If these risks are making you reconsider your opinion on Linekong Interactive Group, explore our interactive list of high quality stocks to get an idea of what else is out there.

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