Central Global Berhad's (KLSE:CGB) 30% Share Price Surge Not Quite Adding Up

The Central Global Berhad (KLSE:CGB) share price has done very well over the last month, posting an excellent gain of 30%. The last 30 days bring the annual gain to a very sharp 84%.

Since its price has surged higher, you could be forgiven for thinking Central Global Berhad is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 4.7x, considering almost half the companies in Malaysia's Commercial Services industry have P/S ratios below 1.6x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Central Global Berhad

What Does Central Global Berhad's Recent Performance Look Like?

As an illustration, revenue has deteriorated at Central Global Berhad over the last year, which is not ideal at all. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Central Global Berhad's earnings, revenue and cash flow.

Do Revenue Forecasts Match The High P/S Ratio?

In order to justify its P/S ratio, Central Global Berhad would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered a frustrating 28% decrease to the company's top line. However, a few very strong years before that means that it was still able to grow revenue by an impressive 37% in total over the last three years. 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.

Comparing that to the industry, which is predicted to deliver 14% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

In light of this, it's alarming that Central Global Berhad's P/S sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

What Does Central Global Berhad's P/S Mean For Investors?

The strong share price surge has lead to Central Global Berhad's P/S soaring as well. 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.

Our examination of Central Global Berhad revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. When we see slower than industry revenue growth but an elevated P/S, there's considerable risk of the share price declining, sending the P/S lower. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Central Global Berhad (1 makes us a bit uncomfortable) you should be aware of.

If you're unsure about the strength of Central Global Berhad'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.