Shenzhen Zqgame Co., Ltd (SZSE:300052) shares have retraced a considerable 26% in the last month, reversing a fair amount of their solid recent performance. The last month has meant the stock is now only up 2.8% during the last year.

Although its price has dipped substantially, when almost half of the companies in China's Entertainment industry have price-to-sales ratios (or "P/S") below 6.7x, you may still consider Shenzhen Zqgame as a stock not worth researching with its 21.1x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

How Shenzhen Zqgame Has Been Performing

While the industry has experienced revenue growth lately, Shenzhen Zqgame's revenue has gone into reverse gear, which is not great. One possibility is that the P/S ratio is high because investors think this poor revenue performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

Do Revenue Forecasts Match The High P/S Ratio?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Shenzhen Zqgame's to be considered reasonable.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 2.3%. The last three years don't look nice either as the company has shrunk revenue by 32% in aggregate. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Looking ahead now, revenue is anticipated to climb by 28% during the coming year according to the one analyst following the company. Meanwhile, the rest of the industry is forecast to expand by 32%, which is noticeably more attractive.

With this information, we find it concerning that Shenzhen Zqgame is trading at a P/S higher than the industry. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

What Does Shenzhen Zqgame's P/S Mean For Investors?

Shenzhen Zqgame's shares may have suffered, but its P/S remains high. 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.

Despite analysts forecasting some poorer-than-industry revenue growth figures for Shenzhen Zqgame, this doesn't appear to be impacting the P/S in the slightest. The weakness in the company's revenue estimate doesn't bode well for the elevated P/S, which could take a fall if the revenue sentiment doesn't improve. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Plus, you should also learn about these 2 warning signs we've spotted with Shenzhen Zqgame (including 1 which makes us a bit uncomfortable).

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

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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.