Improved Revenues Required Before The Star Entertainment Group Limited (ASX:SGR) Stock's 52% Jump Looks Justified
The Star Entertainment Group Limited (ASX:SGR) shares have continued their recent momentum with a 52% gain in the last month alone. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 16% over that time.
Although its price has surged higher, it would still be understandable if you think Star Entertainment Group is a stock with good investment prospects with a price-to-sales ratios (or "P/S") of 0.8x, considering almost half the companies in Australia's Hospitality industry have P/S ratios above 1.6x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.
View our latest analysis for Star Entertainment Group
What Does Star Entertainment Group's P/S Mean For Shareholders?
Star Entertainment Group has been struggling lately as its revenue has declined faster than most other companies. It seems that many are expecting the dismal revenue performance to persist, which has repressed the P/S. You'd much rather the company improve its revenue performance if you still believe in the business. If not, then existing shareholders will probably struggle to get excited about the future direction of the share price.
If you'd like to see what analysts are forecasting going forward, you should check out our free report on Star Entertainment Group.Is There Any Revenue Growth Forecasted For Star Entertainment Group?
In order to justify its P/S ratio, Star Entertainment Group would need to produce sluggish growth that's trailing the industry.
Retrospectively, the last year delivered a frustrating 19% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 11% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.
Looking ahead now, revenue is anticipated to slump, contracting by 1.4% per annum during the coming three years according to the three analysts following the company. With the industry predicted to deliver 6.5% growth per annum, that's a disappointing outcome.
With this information, we are not surprised that Star Entertainment Group 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.
What We Can Learn From Star Entertainment Group's P/S?
Star Entertainment Group's stock price has surged recently, but its but its P/S still remains modest. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.
As we suspected, our examination of Star Entertainment Group'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, Star Entertainment Group's poor outlook justifies its low 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 3 warning signs for Star Entertainment Group (2 shouldn't be ignored) 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.