BAIOO Family Interactive Limited (HKG:2100) shareholders would be excited to see that the share price has had a great month, posting a 27% gain and recovering from prior weakness. Unfortunately, despite the strong performance over the last month, the full year gain of 3.9% isn't as attractive.

Although its price has surged higher, there still wouldn't be many who think BAIOO Family Interactive's price-to-sales (or "P/S") ratio of 1.2x is worth a mention when the median P/S in Hong Kong's Entertainment industry is similar at about 1.5x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

See our latest analysis for BAIOO Family Interactive

How BAIOO Family Interactive Has Been Performing

As an illustration, revenue has deteriorated at BAIOO Family Interactive over the last year, which is not ideal at all. It might be that many expect the company to put the disappointing revenue performance behind them over the coming period, which has kept the P/S from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on BAIOO Family Interactive's earnings, revenue and cash flow.

How Is BAIOO Family Interactive's Revenue Growth Trending?

There's an inherent assumption that a company should be matching the industry for P/S ratios like BAIOO Family Interactive'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 45%. This means it has also seen a slide in revenue over the longer-term as revenue is down 39% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

In contrast to the company, the rest of the industry is expected to grow by 13% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this information, we find it concerning that BAIOO Family Interactive is trading at a fairly similar P/S compared to the industry. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

The Key Takeaway

Its shares have lifted substantially and now BAIOO Family Interactive's P/S is back within range of the industry median. 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.

Our look at BAIOO Family Interactive revealed its shrinking revenues over the medium-term haven't impacted the P/S as much as we anticipated, given the industry is set to grow. When we see revenue heading backwards in the context of growing industry forecasts, it'd make sense to expect a possible share price decline on the horizon, sending the moderate P/S lower. If recent medium-term revenue trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

And what about other risks? Every company has them, and we've spotted 3 warning signs for BAIOO Family Interactive (of which 1 can't be ignored!) you should know about.

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

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