Even With A 30% Surge, Cautious Investors Are Not Rewarding Close the Loop Ltd's (ASX:CLG) Performance Completely

Close the Loop Ltd (ASX:CLG) shares have continued their recent momentum with a 30% gain in the last month alone. But the last month did very little to improve the 71% share price decline over the last year.

Even after such a large jump in price, Close the Loop may still be sending bullish signals at the moment with its price-to-sales (or "P/S") ratio of 0.2x, since almost half of all companies in the Commercial Services industry in Australia have P/S ratios greater than 1.6x and even P/S higher than 4x are not unusual. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

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View our latest analysis for Close the Loop

What Does Close the Loop's P/S Mean For Shareholders?

While the industry has experienced revenue growth lately, Close the Loop's revenue has gone into reverse gear, which is not great. The P/S ratio is probably low because investors think this poor revenue performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

Keen to find out how analysts think Close the Loop's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Any Revenue Growth Forecasted For Close the Loop?

The only time you'd be truly comfortable seeing a P/S as low as Close the Loop'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 6.6%. Still, the latest three year period has seen an excellent 178% overall rise in revenue, in spite of its unsatisfying short-term performance. So we can start by confirming that the company has generally done a very good job of growing revenue over that time, even though it had some hiccups along the way.

Turning to the outlook, the next three years should generate growth of 6.8% per year as estimated by the only analyst watching the company. Meanwhile, the rest of the industry is forecast to expand by 5.5% per year, which is not materially different.

With this in consideration, we find it intriguing that Close the Loop's P/S is lagging behind its industry peers. It may be that most investors are not convinced the company can achieve future growth expectations.

The Key Takeaway

The latest share price surge wasn't enough to lift Close the Loop's P/S close to the industry median. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of Close the Loop's revealed that its P/S remains low despite analyst forecasts of revenue growth matching the wider industry. Despite average revenue growth estimates, there could be some unobserved threats keeping the P/S low. It appears some are indeed anticipating revenue instability, because these conditions should normally provide more support to the share price.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Close the Loop (at least 2 which don't sit too well with us), and understanding them should be part of your investment process.

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

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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.