Knafaim Holdings Ltd.'s (TLV:KNFM) 25% Share Price Surge Not Quite Adding Up

The Knafaim Holdings Ltd. (TLV:KNFM) share price has done very well over the last month, posting an excellent gain of 25%. Looking back a bit further, it's encouraging to see the stock is up 26% in the last year.

After such a large jump in price, you could be forgiven for thinking Knafaim Holdings is a stock not worth researching with a price-to-sales ratios (or "P/S") of 2x, considering almost half the companies in Israel's Airlines industry have P/S ratios below 0.6x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

See our latest analysis for Knafaim Holdings

How Has Knafaim Holdings Performed Recently?

Revenue has risen at a steady rate over the last year for Knafaim Holdings, which is generally not a bad outcome. One possibility is that the P/S ratio is high because investors think this good revenue growth will be enough to outperform the broader industry in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Although there are no analyst estimates available for Knafaim Holdings, 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 Knafaim Holdings?

The only time you'd be truly comfortable seeing a P/S as high as Knafaim Holdings' is when the company's growth is on track to outshine the industry.

Retrospectively, the last year delivered a decent 5.8% gain to the company's revenues. Although, the latest three year period in total hasn't been as good as it didn't manage to provide any growth at all. Therefore, it's fair to say that revenue growth has been inconsistent recently for the company.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 11% shows it's noticeably less attractive.

With this in mind, we find it worrying that Knafaim Holdings' P/S exceeds that of its industry peers. 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.

What Does Knafaim Holdings' P/S Mean For Investors?

Knafaim Holdings' P/S is on the rise since its shares have risen strongly. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of Knafaim Holdings 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. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You need to take note of risks, for example - Knafaim Holdings has 6 warning signs (and 3 which shouldn't be ignored) we think you should know about.

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.