paragon GmbH & Co. KGaA's (ETR:PGN) 28% Share Price Surge Not Quite Adding Up

Despite an already strong run, paragon GmbH & Co. KGaA (ETR:PGN) shares have been powering on, with a gain of 28% in the last thirty days. The last 30 days bring the annual gain to a very sharp 27%.

Although its price has surged higher, it's still not a stretch to say that paragon GmbH KGaA's price-to-sales (or "P/S") ratio of 0.1x right now seems quite "middle-of-the-road" compared to the Auto Components industry in Germany, where the median P/S ratio is around 0.2x. 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.

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Check out our latest analysis for paragon GmbH KGaA

What Does paragon GmbH KGaA's P/S Mean For Shareholders?

For instance, paragon GmbH KGaA's receding revenue in recent times would have to be some food for thought. One possibility is that the P/S is moderate because investors think the company might still do enough to be in line with the broader industry in the near future. 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.

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 paragon GmbH KGaA's earnings, revenue and cash flow.

How Is paragon GmbH KGaA's Revenue Growth Trending?

There's an inherent assumption that a company should be matching the industry for P/S ratios like paragon GmbH KGaA'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 19%. This means it has also seen a slide in revenue over the longer-term as revenue is down 14% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Comparing that to the industry, which is predicted to deliver 2.3% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this in mind, we find it worrying that paragon GmbH KGaA's P/S exceeds that of its industry peers. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh on the share price eventually.

The Bottom Line On paragon GmbH KGaA's P/S

paragon GmbH KGaA's stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

The fact that paragon GmbH KGaA currently trades at a P/S on par with the rest of the industry is surprising to us since its recent revenues have been in decline over the medium-term, all while the industry is set to grow. When we see revenue heading backwards in the context of growing industry forecasts, it'd make sense to expect a possible share price decline on the horizon, sending the moderate P/S lower. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

Plus, you should also learn about these 3 warning signs we've spotted with paragon GmbH KGaA (including 1 which makes us a bit uncomfortable).

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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.