Investors Appear Satisfied With Northern Data AG's (FRA:NB2) Prospects

When you see that almost half of the companies in the Software industry in Germany have price-to-sales ratios (or "P/S") below 2x, Northern Data AG (FRA:NB2) looks to be giving off strong sell signals with its 7.4x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

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View our latest analysis for Northern Data

What Does Northern Data's Recent Performance Look Like?

Recent times have been advantageous for Northern Data as its revenues have been rising faster than most other companies. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. 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 Northern Data will help you uncover what's on the horizon.

Is There Enough Revenue Growth Forecasted For Northern Data?

The only time you'd be truly comfortable seeing a P/S as steep as Northern Data's is when the company's growth is on track to outshine the industry decidedly.

If we review the last year of revenue growth, the company posted a terrific increase of 158%. As a result, it also grew revenue by 5.5% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

Shifting to the future, estimates from the six analysts covering the company suggest revenue should grow by 42% per annum over the next three years. With the industry only predicted to deliver 12% each year, the company is positioned for a stronger revenue result.

With this information, we can see why Northern Data is trading at such a high P/S compared to the industry. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Northern Data's P/S

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.

As we suspected, our examination of Northern Data's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

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

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.