The Byke Hospitality Limited (NSE:BYKE) Stock Rockets 35% As Investors Are Less Pessimistic Than Expected

The The Byke Hospitality Limited (NSE:BYKE) share price has done very well over the last month, posting an excellent gain of 35%. Looking back a bit further, it's encouraging to see the stock is up 60% in the last year.

In spite of the firm bounce in price, it's still not a stretch to say that Byke Hospitality's price-to-sales (or "P/S") ratio of 5.8x right now seems quite "middle-of-the-road" compared to the Hospitality industry in India, where the median P/S ratio is around 5.1x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

See our latest analysis for Byke Hospitality

What Does Byke Hospitality's Recent Performance Look Like?

As an illustration, revenue has deteriorated at Byke Hospitality over the last year, which is not ideal at all. It might be that many expect the company to put the disappointing revenue performance behind them over the coming period, which has kept the P/S from falling. 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 Byke Hospitality, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Do Revenue Forecasts Match The P/S Ratio?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Byke Hospitality's to be considered reasonable.

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 11%. Regardless, revenue has managed to lift by a handy 19% in aggregate from three years ago, thanks to the earlier period of growth. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been mostly respectable for the company.

This is in contrast to the rest of the industry, which is expected to grow by 33% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it interesting that Byke Hospitality is trading at a fairly similar P/S compared to the industry. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. 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 Byke Hospitality's P/S Mean For Investors?

Byke Hospitality'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.

We've established that Byke Hospitality's average P/S is a bit surprising since its recent three-year growth is lower than the wider industry forecast. When we see weak revenue with slower than industry growth, we suspect the share price is at risk of declining, bringing the P/S back in line with expectations. 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.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Byke Hospitality that you need to be mindful of.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.