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Ainsworth Game Technology Limited (ASX:AGI) may have moved too fast and too quickly with a recent 26% price drop

To the annoyance of some shareholders Ainsworth Game Technology Limited (ASX:AGI) Shares are down a significant 26% in the past month, continuing a terrible run for the company. Instead of being rewarded, shareholders who have already held on to their shares over the past twelve months are now down 18%.

Despite the heavy price drop, it’s still not a stretch to say that Ainsworth Game Technology’s price-to-sales ratio (or “P/S”) of 1.1x seems pretty “middle-of-the-road” right now. compared to the hospitality industry in Australia, where the average price-to-earnings ratio is approximately 1.3x. While this may not raise any eyebrows, if the price-to-earnings ratio is not justified, investors may miss out on a potential opportunity or ignore an impending disappointment.

Check out our latest analysis for Ainsworth Game Technology

ASX:AGI price-to-sales ratio versus industry May 21, 2024

What does Ainsworth Game Technology’s P/S mean for shareholders?

There’s been little divergence between Ainsworth Game Technology’s revenue growth and the industry lately. It appears many expect the mediocre revenue performance to continue, which has held back the price-to-earnings ratio. If you like the company, you hope it can at least be maintained so you can pick up some shares while it’s not quite to your liking.

If you want to see what analysts are predicting for the future, check out our free report on Ainsworth Game Technology.

How is Ainsworth Game Technology’s revenue growth trending?

To justify the price/earnings ratio, Ainsworth Game Technology would have to achieve growth comparable to the industry.

Retrospectively, the past year delivered a decent 15% gain to the company’s revenue. This was supported by an excellent period before sales increased by a total of 150% over the past three years. So we can start by confirming that the company has done a great job of growing revenue over that time.

In terms of prospects, the next three years should generate growth of 3.2% per year, as estimated by the two analysts covering the company. With the sector expected to grow at 7.4% per year, the company is positioned for a weaker top line performance.

With this information, we find it interesting that Ainsworth Game Technology is trading at a fairly similar P/S compared to the industry. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay for exposure to the stock. These shareholders could prepare for future disappointment if the price/earnings ratio falls to a level more in line with growth prospects.

The most important takeaway

Now that the share price has fallen off a cliff, the P/S for Ainsworth Game Technology appears to be in line with the rest of the hospitality sector. It is argued that the price-to-sales ratio is an inferior measure of value within certain sectors, but it can be a powerful indicator of business confidence.

Given that Ainsworth Game Technology’s revenue growth forecasts are relatively muted compared to the broader industry, it comes as a surprise to see the company trading at its current price-to-earnings ratio. At this point, we are not confident in the price-to-earnings ratio as forecast future earnings are unlikely to support more positive sentiment for long. This puts shareholders’ investments at risk and potential investors run the risk of paying an unnecessary premium.

Many other vital risk factors can be found on the company’s balance sheet. Us free Balance sheet analysis for Ainsworth Game Technology with six simple checks allows you to spot any risks that could be a problem.

If strong companies that make profits interest you, then you’ll definitely want to check this out free list of interesting companies that trade at a low price/earnings (but have proven that they can grow their profits).

Valuation is complex, but we help make it simple.

Find out whether Ainsworth Game Technology may be over or undervalued by checking out our comprehensive analysis, including: fair value estimates, risks and cautions, dividends, insider transactions and financial health.

View the Free Analysis

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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. We aim to provide you with targeted, long-term analysis based on fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or quality material. Simply Wall St has no positions in the stocks mentioned.