Investors Give Northcoders Group PLC (LON:CODE) Shares A 28% Hiding

The Northcoders Group PLC (LON:CODE) share price has fared very poorly over the last month, falling by a substantial 28%. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 27% in that time.

Following the heavy fall in price, it would be understandable if you think Northcoders Group is a stock with good investment prospects with a price-to-sales ratios (or "P/S") of 1.2x, considering almost half the companies in the United Kingdom's Consumer Services industry have P/S ratios above 2.5x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

Check out our latest analysis for Northcoders Group

How Northcoders Group Has Been Performing

Northcoders Group certainly has been doing a good job lately as its revenue growth has been positive while most other companies have been seeing their revenue go backwards. It might be that many expect the strong revenue performance to degrade substantially, possibly more than the industry, which has repressed the P/S. Those who are bullish on Northcoders Group will be hoping that this isn't the case and the company continues to beat out the industry.

Keen to find out how analysts think Northcoders Group's future stacks up against the industry? In that case, our free report is a great place to start.

What Are Revenue Growth Metrics Telling Us About The Low P/S?

There's an inherent assumption that a company should underperform the industry for P/S ratios like Northcoders Group's to be considered reasonable.

Taking a look back first, we see that the company grew revenue by an impressive 20% last year. The latest three year period has also seen an incredible overall rise in revenue, aided by its incredible short-term performance. Accordingly, shareholders would have been over the moon with those medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 19% per annum during the coming three years according to the sole analyst following the company. That's shaping up to be materially higher than the 7.9% per year growth forecast for the broader industry.

With this information, we find it odd that Northcoders Group is trading at a P/S lower than the industry. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

What Does Northcoders Group's P/S Mean For Investors?

Northcoders Group's P/S has taken a dip along with its share price. 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.

A look at Northcoders Group's revenues reveals that, despite glowing future growth forecasts, its P/S is much lower than we'd expect. There could be some major risk factors that are placing downward pressure on the P/S ratio. It appears the market could be anticipating revenue instability, because these conditions should normally provide a boost to the share price.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Northcoders Group that you should be aware of.

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.