Further Upside For North Media A/S (CPH:NORTHM) Shares Could Introduce Price Risks After 27% Bounce

North Media A/S (CPH:NORTHM) shares have continued their recent momentum with a 27% gain in the last month alone. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 14% in the last twelve months.

Even after such a large jump in price, it's still not a stretch to say that North Media's price-to-sales (or "P/S") ratio of 0.7x right now seems quite "middle-of-the-road" compared to the Media industry in Denmark, seeing as it matches the P/S ratio of the wider industry. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

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What Does North Media's P/S Mean For Shareholders?

Recent times have been quite advantageous for North Media as its revenue has been rising very briskly. The P/S is probably moderate because investors think this strong revenue growth might not be enough to outperform the broader industry in the near future. If that doesn't eventuate, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on North Media will help you shine a light on its historical performance.

How Is North Media's Revenue Growth Trending?

The only time you'd be comfortable seeing a P/S like North Media's is when the company's growth is tracking the industry closely.

Taking a look back first, we see that the company grew revenue by an impressive 30% last year. The latest three year period has also seen a 24% overall rise in revenue, aided extensively by its short-term performance. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

In contrast to the company, the rest of the industry is expected to decline by 2.7% over the next year, which puts the company's recent medium-term positive growth rates in a good light for now.

In light of this, it's peculiar that North Media's P/S sits in line with the majority of other companies. It looks like most investors are not convinced the company can maintain its recent positive growth rate in the face of a shrinking broader industry.

The Key Takeaway

Its shares have lifted substantially and now North Media's P/S is back within range of the industry median. 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.

Our examination of North Media revealed its growing revenue over the medium-term hasn't helped elevate its P/S above that of the industry, which is surprising given the industry is set to shrink. There could be some unobserved threats to revenue preventing the P/S ratio from outpacing the industry much like its revenue performance. One major risk is whether its revenue trajectory can keep outperforming under these tough industry conditions. The fact that the company's relative performance has not provided a kick to the share price suggests that some investors are anticipating revenue instability.

Before you take the next step, you should know about the 1 warning sign for North Media that we have uncovered.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.