Arad Investment & Industrial Development Ltd.'s (TLV:ARAD) Shares Climb 39% But Its Business Is Yet to Catch Up

Despite an already strong run, Arad Investment & Industrial Development Ltd. (TLV:ARAD) shares have been powering on, with a gain of 39% in the last thirty days. But the last month did very little to improve the 69% share price decline over the last year.

Even after such a large jump in price, there still wouldn't be many who think Arad Investment & Industrial Development's price-to-sales (or "P/S") ratio of 0.2x is worth a mention when the median P/S in Israel's IT industry is similar at about 0.5x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

View our latest analysis for Arad Investment & Industrial Development

How Arad Investment & Industrial Development Has Been Performing

Recent times have been quite advantageous for Arad Investment & Industrial Development as its revenue has been rising very briskly. The P/S is probably moderate because investors think this strong revenue growth might not be enough to outperform the broader industry in the near future. Those who are bullish on Arad Investment & Industrial Development will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

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

Do Revenue Forecasts Match The P/S Ratio?

Arad Investment & Industrial Development'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.

Taking a look back first, we see that the company grew revenue by an impressive 34% last year. The latest three year period has also seen a 14% overall rise in revenue, aided extensively by its short-term performance. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

Comparing that to the industry, which is predicted to deliver 9.7% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

With this information, we find it interesting that Arad Investment & Industrial Development is trading at a fairly similar P/S compared to the industry. 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 We Can Learn From Arad Investment & Industrial Development's P/S?

Arad Investment & Industrial Development's stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. 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 Arad Investment & Industrial Development 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. If recent medium-term revenue trends continue, the probability of a share price decline will become quite substantial, placing shareholders at risk.

You should always think about risks. Case in point, we've spotted 3 warning signs for Arad Investment & Industrial Development you should be aware of, and 2 of them are significant.

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.