Revenues Not Telling The Story For paragon GmbH & Co. KGaA (ETR:PGN) After Shares Rise 57%

paragon GmbH & Co. KGaA (ETR:PGN) shares have continued their recent momentum with a 57% gain in the last month alone. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 13% in the last twelve months.

Even after such a large jump in price, there still wouldn't be many who think paragon GmbH KGaA's price-to-sales (or "P/S") ratio of 0.1x is worth a mention when the median P/S in Germany's Auto Components industry is similar at about 0.2x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

See our latest analysis for paragon GmbH KGaA

How paragon GmbH KGaA Has Been Performing

For instance, paragon GmbH KGaA's receding revenue in recent times would have to be some food for thought. Perhaps investors believe the recent revenue performance is enough to keep in line with the industry, which is keeping the P/S from dropping off. If not, then existing shareholders may be a little nervous about the viability of the share price.

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.

Is There Some Revenue Growth Forecasted For paragon GmbH KGaA?

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 8.0%. This means it has also seen a slide in revenue over the longer-term as revenue is down 3.8% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

In contrast to the company, the rest of the industry is expected to grow by 6.2% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

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.

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

paragon GmbH KGaA appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

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. If recent medium-term revenue trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

It is also worth noting that we have found 4 warning signs for paragon GmbH KGaA (3 are significant!) that you need to take into consideration.

If these risks are making you reconsider your opinion on paragon GmbH KGaA, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.