Optimistic Investors Push Dan Hotels Ltd (TLV:DANH) Shares Up 28% But Growth Is Lacking

Dan Hotels Ltd (TLV:DANH) shareholders would be excited to see that the share price has had a great month, posting a 28% gain and recovering from prior weakness. Looking back a bit further, it's encouraging to see the stock is up 44% in the last year.

In spite of the firm bounce in price, it's still not a stretch to say that Dan Hotels' price-to-sales (or "P/S") ratio of 2.3x right now seems quite "middle-of-the-road" compared to the Hospitality industry in Israel, seeing as it matches the P/S ratio of the wider industry. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

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View our latest analysis for Dan Hotels

What Does Dan Hotels' P/S Mean For Shareholders?

For instance, Dan Hotels' receding revenue in recent times would have to be some food for thought. One possibility is that the P/S is moderate because investors think the company might still do enough to be in line with the broader industry in the near future. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

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

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

In order to justify its P/S ratio, Dan Hotels would need to produce growth that's similar to the industry.

Retrospectively, the last year delivered a frustrating 5.9% decrease to the company's top line. Regardless, revenue has managed to lift by a handy 20% in aggregate from three years ago, thanks to the earlier period of growth. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of revenue growth.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 24% shows it's noticeably less attractive.

With this in mind, we find it intriguing that Dan Hotels' P/S is comparable to that of its industry peers. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. They may be setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

What Does Dan Hotels' P/S Mean For Investors?

Its shares have lifted substantially and now Dan Hotels' P/S is back within range of the industry median. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Our examination of Dan Hotels revealed its poor three-year revenue trends aren't resulting in a lower P/S as per our expectations, given they look worse than current industry outlook. Right now we are uncomfortable with the P/S as this revenue performance isn't likely to support a more positive sentiment for long. Unless the recent medium-term conditions improve, it's hard to accept the current share price as fair value.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Dan Hotels you should know about.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.