What Chubb Arabia Cooperative Insurance Company's (TADAWUL:8240) 29% Share Price Gain Is Not Telling You

Chubb Arabia Cooperative Insurance Company (TADAWUL:8240) shares have had a really impressive month, gaining 29% after a shaky period beforehand. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 5.1% over the last year.

Since its price has surged higher, when almost half of the companies in Saudi Arabia's Insurance industry have price-to-sales ratios (or "P/S") below 0.9x, you may consider Chubb Arabia Cooperative Insurance as a stock not worth researching with its 6.7x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

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Check out our latest analysis for Chubb Arabia Cooperative Insurance

How Has Chubb Arabia Cooperative Insurance Performed Recently?

As an illustration, revenue has deteriorated at Chubb Arabia Cooperative Insurance over the last year, which is not ideal at all. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. If not, then existing shareholders may be quite nervous about the viability of the share price.

Although there are no analyst estimates available for Chubb Arabia Cooperative Insurance, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For Chubb Arabia Cooperative Insurance?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Chubb Arabia Cooperative Insurance'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 34%. However, a few very strong years before that means that it was still able to grow revenue by an impressive 31% 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 the recent medium-term revenue trends against the industry's one-year growth forecast of 21% shows it's noticeably less attractive.

In light of this, it's alarming that Chubb Arabia Cooperative Insurance's P/S sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. 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.

The Bottom Line On Chubb Arabia Cooperative Insurance's P/S

The strong share price surge has lead to Chubb Arabia Cooperative Insurance's P/S soaring as well. 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.

Our examination of Chubb Arabia Cooperative Insurance 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.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Chubb Arabia Cooperative Insurance (1 doesn't sit too well with us!) that you need to be mindful of.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.