Napatech A/S' (OB:NAPA) 26% Cheaper Price Remains In Tune With Revenues

Napatech A/S (OB:NAPA) shareholders won't be pleased to see that the share price has had a very rough month, dropping 26% and undoing the prior period's positive performance. The last month has meant the stock is now only up 3.0% during the last year.

Although its price has dipped substantially, you could still be forgiven for thinking Napatech is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 10.3x, considering almost half the companies in Norway's Communications industry have P/S ratios below 1x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

View our latest analysis for Napatech

What Does Napatech's P/S Mean For Shareholders?

With revenue that's retreating more than the industry's average of late, Napatech has been very sluggish. One possibility is that the P/S ratio is high because investors think the company will turn things around completely and accelerate past most others in the industry. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

How Is Napatech's Revenue Growth Trending?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Napatech's to be considered reasonable.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 36%. This means it has also seen a slide in revenue over the longer-term as revenue is down 40% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Looking ahead now, revenue is anticipated to climb by 85% per year during the coming three years according to the lone analyst following the company. Meanwhile, the rest of the industry is forecast to only expand by 3.8% per annum, which is noticeably less attractive.

In light of this, it's understandable that Napatech's P/S sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From Napatech's P/S?

Even after such a strong price drop, Napatech's P/S still exceeds the industry median significantly. 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 Napatech maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Communications industry, as expected. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Napatech, and understanding these should be part of your investment process.

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