DouYu International Holdings Limited's (NASDAQ:DOYU) price-to-sales (or "P/S") ratio of 0.4x may look like a pretty appealing investment opportunity when you consider close to half the companies in the Entertainment industry in the United States have P/S ratios greater than 1.1x. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.
What Does DouYu International Holdings' Recent Performance Look Like?
DouYu International Holdings hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. Perhaps the P/S remains low as investors think the prospects of strong revenue growth aren't on the horizon. If you still like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.
Want the full picture on analyst estimates for the company? Then our free report on DouYu International Holdings will help you uncover what's on the horizon.
How Is DouYu International Holdings' Revenue Growth Trending?
In order to justify its P/S ratio, DouYu International Holdings would need to produce sluggish growth that's trailing the industry.
Retrospectively, the last year delivered a frustrating 23% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 27% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.
Shifting to the future, estimates from the nine analysts covering the company suggest revenue growth is heading into negative territory, declining 13% over the next year. Meanwhile, the broader industry is forecast to expand by 13%, which paints a poor picture.
With this information, we are not surprised that DouYu International Holdings is trading at a P/S lower than the industry. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.
The Key Takeaway
Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
With revenue forecasts that are inferior to the rest of the industry, it's no surprise that DouYu International Holdings' P/S is on the lower end of the spectrum. 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.
Don't forget that there may be other risks. For instance, we've identified 1 warning sign for DouYu International Holdings that you should be aware of.
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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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.