The Star Entertainment Group Limited (ASX:SGR) Shares Fly 26% But Investors Aren't Buying For Growth

The Star Entertainment Group Limited (ASX:SGR) shareholders are no doubt pleased to see that the share price has bounced 26% 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 69% share price decline over the last year.

Although its price has surged higher, when close to half the companies operating in Australia's Hospitality industry have price-to-sales ratios (or "P/S") above 1.4x, you may still consider Star Entertainment Group as an enticing stock to check out with its 0.2x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

Check out our latest analysis for Star Entertainment Group

How Star Entertainment Group Has Been Performing

Star Entertainment Group hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. The P/S ratio is probably low because investors think this poor revenue performance isn't going to get any better. So while you could say the stock is cheap, investors will be looking for improvement before they see it as good value.

Want the full picture on analyst estimates for the company? Then our free report on Star Entertainment Group will help you uncover what's on the horizon.

How Is Star Entertainment Group's Revenue Growth Trending?

There's an inherent assumption that a company should underperform the industry for P/S ratios like Star Entertainment Group's to be considered reasonable.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 10%. That put a dampener on the good run it was having over the longer-term as its three-year revenue growth is still a noteworthy 8.6% in total. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been mostly respectable for the company.

Shifting to the future, estimates from the five analysts covering the company suggest revenue growth is heading into negative territory, declining 5.7% per annum over the next three years. With the industry predicted to deliver 5.1% growth each year, that's a disappointing outcome.

In light of this, it's understandable that Star Entertainment Group's P/S would sit below the majority of other companies. However, shrinking revenues are unlikely to lead to a stable P/S over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Key Takeaway

Star Entertainment Group's stock price has surged recently, but its but its P/S still remains modest. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

With revenue forecasts that are inferior to the rest of the industry, it's no surprise that Star Entertainment Group's P/S is on the lower end of the spectrum. As other companies in the industry are forecasting revenue growth, Star Entertainment Group'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.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Star Entertainment Group (1 makes us a bit uncomfortable!) that you need to be mindful of.

If these risks are making you reconsider your opinion on Star Entertainment Group, 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.