There Is A Reason DouYu International Holdings Limited's (NASDAQ:DOYU) Price Is Undemanding
With a price-to-sales (or "P/S") ratio of 0.3x DouYu International Holdings Limited (NASDAQ:DOYU) may be sending bullish signals at the moment, given that almost half of all the Entertainment companies in the United States have P/S ratios greater than 1.3x and even P/S higher than 5x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.
See our latest analysis for DouYu International Holdings
What Does DouYu International Holdings' P/S Mean For Shareholders?
DouYu International Holdings could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. The P/S ratio is probably low because investors think this poor revenue performance isn't going to get any better. 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.
Keen to find out how analysts think DouYu International Holdings' future stacks up against the industry? In that case, our free report is a great place to start.How Is DouYu International Holdings' Revenue Growth Trending?
There's an inherent assumption that a company should underperform the industry for P/S ratios like DouYu International Holdings' 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 8.9%. This means it has also seen a slide in revenue over the longer-term as revenue is down 48% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.
Turning to the outlook, the next year should bring diminished returns, with revenue decreasing 9.8% as estimated by the three analysts watching the company. With the industry predicted to deliver 19% growth, that's a disappointing outcome.
In light of this, it's understandable that DouYu International Holdings' P/S would sit below the majority of other companies. 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 Bottom Line On DouYu International Holdings' P/S
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.
As we suspected, our examination of DouYu International Holdings' analyst forecasts revealed that its outlook for shrinking revenue 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. It's hard to see the share price rising strongly in the near future under these circumstances.
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.
If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.
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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.