With a price-to-sales (or "P/S") ratio of 1.4x Wanda Film Holding Co., Ltd. (SZSE:002739) may be sending very bullish signals at the moment, given that almost half of all the Entertainment companies in China have P/S ratios greater than 5x and even P/S higher than 9x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/S.

How Wanda Film Holding Has Been Performing

There hasn't been much to differentiate Wanda Film Holding's and the industry's revenue growth lately. It might be that many expect the mediocre revenue performance to degrade, which has repressed the P/S ratio. If you like the company, you'd be hoping this isn't the case so that you could pick up some stock while it's out of favour.

What Are Revenue Growth Metrics Telling Us About The Low P/S?

In order to justify its P/S ratio, Wanda Film Holding would need to produce anemic growth that's substantially trailing the industry.

Taking a look back first, we see that the company grew revenue by an impressive 20% last year. The latest three year period has also seen a 23% overall rise in revenue, aided extensively by its short-term performance. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

Turning to the outlook, the next year should generate growth of 12% as estimated by the eleven analysts watching the company. That's shaping up to be materially lower than the 28% growth forecast for the broader industry.

In light of this, it's understandable that Wanda Film Holding's P/S sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

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.

As we suspected, our examination of Wanda Film Holding's analyst forecasts revealed that its inferior revenue outlook is contributing to its low P/S. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Having said that, be aware Wanda Film Holding is showing 1 warning sign in our investment analysis, you should know about.

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).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.