There's Reason For Concern Over Dan Hotels Ltd's (TLV:DANH) Massive 29% Price Jump

The Dan Hotels Ltd (TLV:DANH) share price has done very well over the last month, posting an excellent gain of 29%. Looking back a bit further, it's encouraging to see the stock is up 26% in the last year.

Although its price has surged higher, there still wouldn't be many who think Dan Hotels' price-to-sales (or "P/S") ratio of 1.9x is worth a mention when the median P/S in Israel's Hospitality industry is similar at about 1.7x. 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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See our latest analysis for Dan Hotels

What Does Dan Hotels' Recent Performance Look Like?

As an illustration, revenue has deteriorated at Dan Hotels over the last year, which is not ideal at all. 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 not, then existing shareholders may be a little nervous about the viability of the share price.

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?

Dan Hotels' 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.

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 9.0%. Even so, admirably revenue has lifted 37% in aggregate from three years ago, notwithstanding the last 12 months. 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 18% shows it's noticeably less attractive.

In light of this, it's curious that Dan Hotels' P/S sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as a continuation of recent revenue trends is likely to weigh down the shares eventually.

What We Can Learn From Dan Hotels' P/S?

Dan Hotels appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

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 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.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Dan Hotels, and understanding them should be part of your investment process.

If these risks are making you reconsider your opinion on Dan Hotels, 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.