Northfield Capital Corporation's (CVE:NFD.A) P/S Still Appears To Be Reasonable

Northfield Capital Corporation's (CVE:NFD.A) price-to-sales (or "P/S") ratio of 6.8x may look like a poor investment opportunity when you consider close to half the companies in the Capital Markets industry in Canada have P/S ratios below 3.7x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

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View our latest analysis for Northfield Capital

What Does Northfield Capital's Recent Performance Look Like?

Northfield Capital certainly has been doing a great job lately as it's been growing its revenue at a really rapid pace. Perhaps the market is expecting future revenue performance to outperform the wider market, which has seemingly got people interested in the stock. However, if this isn't the case, investors might get caught out paying too much for the stock.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Northfield Capital's earnings, revenue and cash flow.

How Is Northfield Capital's Revenue Growth Trending?

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

Retrospectively, the last year delivered an exceptional 58% gain to the company's top line. However, the latest three year period hasn't been as great in aggregate 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 that to the industry, which is predicted to shrink 29% in the next 12 months, the company's positive momentum based on recent medium-term revenue results is a bright spot for the moment.

In light of this, it's understandable that Northfield Capital's P/S sits above the majority of other companies. Investors are willing to pay more for a stock they hope will buck the trend of the broader industry going backwards. However, its current revenue trajectory will be very difficult to maintain against the headwinds other companies are facing at the moment.

The Bottom Line On Northfield Capital's P/S

It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Northfield Capital revealed its growing revenue over the medium-term is helping prop up its high P/S compared to its peers, given the industry is set to shrink. It could be said that investors feel this revenue growth will continue into the future, justifying a higher P/S ratio. Our only concern is whether its revenue trajectory can keep outperforming under these tough industry conditions. If things remain consistent though, shareholders shouldn't expect any major share price shocks in the near term.

It is also worth noting that we have found 3 warning signs for Northfield Capital (2 don't sit too well with us!) that you need to take into consideration.

If you're unsure about the strength of Northfield Capital's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.