Dana Incorporated (NYSE:DAN) shareholders are no doubt pleased to see that the share price has bounced 30% in the last month, although it is still struggling to make up recently lost ground. Notwithstanding the latest gain, the annual share price return of 9.1% isn't as impressive.
Even after such a large jump in price, there still wouldn't be many who think Dana's price-to-sales (or "P/S") ratio of 0.2x is worth a mention when the median P/S in the United States' Auto Components industry is similar at about 0.6x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.
We've discovered 2 warning signs about Dana. View them for free.View our latest analysis for Dana
What Does Dana's P/S Mean For Shareholders?
Dana has been struggling lately as its revenue has declined faster than most other companies. It might be that many expect the dismal revenue performance to revert back to industry averages soon, which has kept the P/S from falling. You'd much rather the company improve its revenue if you still believe in the business. Or at the very least, you'd be hoping it doesn't keep underperforming if your plan is to pick up some stock while it's not in favour.
Want the full picture on analyst estimates for the company? Then our free report on Dana will help you uncover what's on the horizon.How Is Dana's Revenue Growth Trending?
The only time you'd be comfortable seeing a P/S like Dana's is when the company's growth is tracking the industry closely.
In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 7.0%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 8.1% overall rise in revenue. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been mostly respectable for the company.
Shifting to the future, estimates from the seven analysts covering the company suggest revenue should grow by 0.2% each year over the next three years. With the industry predicted to deliver 42% growth each year, the company is positioned for a weaker revenue result.
With this information, we find it interesting that Dana is trading at a fairly similar P/S compared to the industry. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.
What We Can Learn From Dana's P/S?
Dana appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
Given that Dana's revenue growth projections are relatively subdued in comparison to the wider industry, it comes as a surprise to see it trading at its current P/S ratio. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. A positive change is needed in order to justify the current price-to-sales ratio.
We don't want to rain on the parade too much, but we did also find 2 warning signs for Dana (1 shouldn't be ignored!) that you need to be mindful of.
If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.
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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.