Funko, Inc.'s (NASDAQ:FNKO) Share Price Boosted 28% But Its Business Prospects Need A Lift Too

Funko, Inc. (NASDAQ:FNKO) shareholders are no doubt pleased to see that the share price has bounced 28% in the last month, although it is still struggling to make up recently lost ground. But the last month did very little to improve the 52% share price decline over the last year.

Although its price has surged higher, when close to half the companies operating in the United States' Leisure industry have price-to-sales ratios (or "P/S") above 1x, you may still consider Funko as an enticing stock to check out with its 0.3x P/S ratio. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

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View our latest analysis for Funko

What Does Funko's P/S Mean For Shareholders?

Recent times have been more advantageous for Funko as its revenue hasn't fallen as much as the rest of the industry. One possibility is that the P/S ratio is low because investors think this relatively better revenue performance might be about to deteriorate significantly. You'd much rather the company continue improving its revenue if you still believe in the business. In saying that, existing shareholders probably aren't pessimistic about the share price if the company's revenue continues outplaying the industry.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Funko.

How Is Funko's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as low as Funko's is when the company's growth is on track to lag the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 3.3%. The last three years don't look nice either as the company has shrunk revenue by 11% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Turning to the outlook, the next year should bring diminished returns, with revenue decreasing 0.2% as estimated by the dual analysts watching the company. Meanwhile, the broader industry is forecast to expand by 1.5%, which paints a poor picture.

In light of this, it's understandable that Funko's 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 Funko's P/S

Funko's stock price has surged recently, but its but its P/S still remains modest. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Funko's analyst forecasts revealed that its outlook for shrinking revenue is contributing to its low P/S. As other companies in the industry are forecasting revenue growth, Funko's poor outlook justifies its low P/S ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Funko (at least 1 which is a bit unpleasant), and understanding them should be part of your investment process.

If you're unsure about the strength of Funko's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.