A Piece Of The Puzzle Missing From Donaco International Limited's (ASX:DNA) 45% Share Price Climb

Donaco International Limited (ASX:DNA) shareholders have had their patience rewarded with a 45% share price jump in the last month. Taking a wider view, although not as strong as the last month, the full year gain of 11% is also fairly reasonable.

In spite of the firm bounce in price, there still wouldn't be many who think Donaco International's price-to-sales (or "P/S") ratio of 1.2x is worth a mention when it essentially matches the median P/S in Australia's Hospitality industry. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

See our latest analysis for Donaco International

What Does Donaco International's Recent Performance Look Like?

Revenue has risen firmly for Donaco International recently, which is pleasing to see. One possibility is that the P/S is moderate because investors think this respectable revenue growth might not be enough to outperform the broader industry in the near future. If that doesn't eventuate, then existing shareholders probably aren't too pessimistic about the future direction of the share price.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Donaco International will help you shine a light on its historical performance.

What Are Revenue Growth Metrics Telling Us About The P/S?

Donaco International's P/S ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the industry.

Retrospectively, the last year delivered an exceptional 24% gain to the company's top line. This great performance means it was also able to deliver immense revenue growth over the last three years. So we can start by confirming that the company has done a tremendous job of growing revenue over that time.

When compared to the industry's one-year growth forecast of 2.8%, the most recent medium-term revenue trajectory is noticeably more alluring

With this information, we find it interesting that Donaco International is trading at a fairly similar P/S compared to the industry. It may be that most investors are not convinced the company can maintain its recent growth rates.

What Does Donaco International's P/S Mean For Investors?

Its shares have lifted substantially and now Donaco International's P/S is back within range of the industry median. 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.

To our surprise, Donaco International revealed its three-year revenue trends aren't contributing to its P/S as much as we would have predicted, given they look better than current industry expectations. It'd be fair to assume that potential risks the company faces could be the contributing factor to the lower than expected P/S. While recent revenue trends over the past medium-term suggest that the risk of a price decline is low, investors appear to see the likelihood of revenue fluctuations in the future.

You need to take note of risks, for example - Donaco International has 3 warning signs (and 1 which is concerning) we think you should know about.

If you're unsure about the strength of Donaco International'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.