Tianyu Digital Technology (Dalian) Group Co., Ltd. (SZSE:002354) shareholders that were waiting for something to happen have been dealt a blow with a 27% share price drop in the last month. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 13% share price drop.

After such a large drop in price, Tianyu Digital Technology (Dalian) Group may be sending bullish signals at the moment with its price-to-sales (or "P/S") ratio of 3.7x, since almost half of all companies in the Entertainment industry in China have P/S ratios greater than 6.3x and even P/S higher than 12x are not unusual. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

See our latest analysis for Tianyu Digital Technology (Dalian) Group

What Does Tianyu Digital Technology (Dalian) Group's P/S Mean For Shareholders?

Tianyu Digital Technology (Dalian) Group could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. It seems that many are expecting the poor revenue performance to persist, which has repressed the P/S ratio. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

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

There's an inherent assumption that a company should underperform the industry for P/S ratios like Tianyu Digital Technology (Dalian) Group'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 6.2%. Even so, admirably revenue has lifted 70% in aggregate from three years ago, notwithstanding the last 12 months. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been more than adequate for the company.

Looking ahead now, revenue is anticipated to climb by 47% during the coming year according to the dual analysts following the company. That's shaping up to be materially higher than the 36% growth forecast for the broader industry.

In light of this, it's peculiar that Tianyu Digital Technology (Dalian) Group's P/S sits below the majority of other companies. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

The Key Takeaway

Tianyu Digital Technology (Dalian) Group's recently weak share price has pulled its P/S back below other Entertainment companies. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

A look at Tianyu Digital Technology (Dalian) Group's revenues reveals that, despite glowing future growth forecasts, its P/S is much lower than we'd expect. There could be some major risk factors that are placing downward pressure on the P/S ratio. At least price risks look to be very low, but investors seem to think future revenues could see a lot of volatility.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Tianyu Digital Technology (Dalian) Group, and understanding should be part of your investment process.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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