GreenTree Hospitality Group Ltd.'s (NYSE:GHG) Earnings Haven't Escaped The Attention Of Investors

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When close to half the companies in the Hospitality industry in the United States have price-to-sales ratios (or "P/S") below 1.3x, you may consider GreenTree Hospitality Group Ltd. (NYSE:GHG) as a stock to potentially avoid with its 2.5x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for GreenTree Hospitality Group


What Does GreenTree Hospitality Group's P/S Mean For Shareholders?

While the industry has experienced revenue growth lately, GreenTree Hospitality Group's revenue has gone into reverse gear, which is not great. One possibility is that the P/S ratio is high because investors think this poor revenue performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Want the full picture on analyst estimates for the company? Then our free report on GreenTree Hospitality Group will help you uncover what's on the horizon.

How Is GreenTree Hospitality Group's Revenue Growth Trending?

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

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 23%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 17% overall rise in revenue. So we can start by confirming that the company has generally done a good job of growing revenue over that time, even though it had some hiccups along the way.

Shifting to the future, estimates from the dual analysts covering the company suggest revenue should grow by 64% over the next year. That's shaping up to be materially higher than the 17% growth forecast for the broader industry.

In light of this, it's understandable that GreenTree Hospitality Group's P/S sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

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.

We've established that GreenTree Hospitality Group maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Hospitality industry, as expected. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless these conditions change, they will continue to provide strong support to the share price.

You need to take note of risks, for example - GreenTree Hospitality Group has 2 warning signs (and 1 which is a bit unpleasant) 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.