Pavillon Holdings Ltd.'s (SGX:596) 29% Share Price Surge Not Quite Adding Up

Despite an already strong run, Pavillon Holdings Ltd. (SGX:596) shares have been powering on, with a gain of 29% in the last thirty days. The annual gain comes to 111% following the latest surge, making investors sit up and take notice.

Since its price has surged higher, when almost half of the companies in Singapore's Hospitality industry have price-to-sales ratios (or "P/S") below 1.7x, you may consider Pavillon Holdings as a stock probably not worth researching with its 3.3x P/S ratio. 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.

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See our latest analysis for Pavillon Holdings

How Has Pavillon Holdings Performed Recently?

It looks like revenue growth has deserted Pavillon Holdings recently, which is not something to boast about. It might be that many are expecting an improvement to the uninspiring revenue performance over the coming period, which has kept the P/S from collapsing. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

Do Revenue Forecasts Match The High P/S Ratio?

In order to justify its P/S ratio, Pavillon Holdings would need to produce impressive growth in excess of the industry.

Taking a look back first, we see that there was hardly any revenue growth to speak of for the company over the past year. Although pleasingly revenue has lifted 38% in aggregate from three years ago, notwithstanding the last 12 months. Accordingly, shareholders will be pleased, but also have some questions to ponder about the last 12 months.

This is in contrast to the rest of the industry, which is expected to grow by 26% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it concerning that Pavillon Holdings is trading at a P/S higher than the industry. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

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

Pavillon Holdings shares have taken a big step in a northerly direction, but its P/S is elevated as a result. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Our examination of Pavillon 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 observe slower-than-industry revenue growth alongside a high P/S ratio, we assume there to be a significant risk of the share price decreasing, which would result in a lower P/S ratio. 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.

There are also other vital risk factors to consider and we've discovered 2 warning signs for Pavillon Holdings (1 doesn't sit too well with us!) that you should be aware of before investing here.

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.