Novatech Industries' (EPA:MLNOV) 45% Share Price Surge Not Quite Adding Up

The Novatech Industries (EPA:MLNOV) share price has done very well over the last month, posting an excellent gain of 45%. Looking back a bit further, it's encouraging to see the stock is up 61% in the last year.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about Novatech Industries' P/S ratio of 0.1x, since the median price-to-sales (or "P/S") ratio for the Electronic industry in France is also close to 0.4x. 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 Novatech Industries

How Novatech Industries Has Been Performing

The revenue growth achieved at Novatech Industries over the last year would be more than acceptable for most companies. It might be that many expect the respectable revenue performance to wane, which has kept the P/S from rising. If that doesn't eventuate, then existing shareholders probably aren't too pessimistic 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 Novatech Industries will help you shine a light on its historical performance.

How Is Novatech Industries' Revenue Growth Trending?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Novatech Industries' to be considered reasonable.

If we review the last year of revenue growth, the company posted a terrific increase of 28%. The strong recent performance means it was also able to grow revenue by 55% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenue over that time.

Comparing that to the industry, which is predicted to deliver 21% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

With this information, we find it interesting that Novatech Industries is trading at a fairly similar P/S compared to the industry. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as a continuation of recent revenue trends is likely to weigh down the shares eventually.

The Key Takeaway

Its shares have lifted substantially and now Novatech Industries' P/S is back within range of the industry median. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Novatech Industries' average P/S is a bit surprising since its recent three-year growth is lower than the wider industry forecast. Right now we are uncomfortable with the P/S as this revenue performance isn't likely to support a more positive sentiment for long. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

Before you settle on your opinion, we've discovered 2 warning signs for Novatech Industries that you should be aware of.

If these risks are making you reconsider your opinion on Novatech Industries, 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com