musicMagpie plc's (LON:MMAG) 28% Share Price Surge Not Quite Adding Up

Those holding musicMagpie plc (LON:MMAG) shares would be relieved that the share price has rebounded 28% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Still, the 30-day jump doesn't change the fact that longer term shareholders have seen their stock decimated by the 58% share price drop in the last twelve months.

Although its price has surged higher, it's still not a stretch to say that musicMagpie's price-to-sales (or "P/S") ratio of 0.1x right now seems quite "middle-of-the-road" compared to the Specialty Retail industry in the United Kingdom, where the median P/S ratio is around 0.2x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

See our latest analysis for musicMagpie

How Has musicMagpie Performed Recently?

musicMagpie could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. One possibility is that the P/S ratio is moderate because investors think this poor revenue performance will turn around. If not, then existing shareholders may be a little nervous about the viability of the share price.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on musicMagpie.

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

In order to justify its P/S ratio, musicMagpie would need to produce growth that's similar to the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 5.7%. As a result, revenue from three years ago have also fallen 11% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Shifting to the future, estimates from the two analysts covering the company suggest revenue should grow by 2.5% over the next year. Meanwhile, the rest of the industry is forecast to expand by 5.0%, which is noticeably more attractive.

With this information, we find it interesting that musicMagpie is trading at a fairly similar P/S compared to the industry. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Bottom Line On musicMagpie's P/S

Its shares have lifted substantially and now musicMagpie'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 look at the analysts forecasts of musicMagpie's revenue prospects has shown that its inferior revenue outlook isn't negatively impacting its P/S as much as we would have predicted. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. Circumstances like this present a risk to current and prospective investors who may see share prices fall if the low revenue growth impacts the sentiment.

Plus, you should also learn about these 4 warning signs we've spotted with musicMagpie (including 1 which can't be ignored).

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.