Napatech A/S (OB:NAPA) Looks Just Right With A 35% Price Jump

Despite an already strong run, Napatech A/S (OB:NAPA) shares have been powering on, with a gain of 35% in the last thirty days. The annual gain comes to 253% following the latest surge, making investors sit up and take notice.

After such a large jump in price, given around half the companies in Norway's Communications industry have price-to-sales ratios (or "P/S") below 1.1x, you may consider Napatech as a stock to avoid entirely with its 12.9x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

See our latest analysis for Napatech

How Has Napatech Performed Recently?

Napatech 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 seems that many are expecting the company to continue defying the broader industry adversity, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders might 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 Napatech.

Do Revenue Forecasts Match The High P/S Ratio?

In order to justify its P/S ratio, Napatech would need to produce outstanding growth that's well in excess of the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 16%. Still, revenue has fallen 13% in total from three years ago, which is quite disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Shifting to the future, estimates from the lone analyst covering the company suggest revenue should grow by 17% over the next year. With the industry only predicted to deliver 2.9%, the company is positioned for a stronger revenue result.

With this in mind, it's not hard to understand why Napatech's P/S is high relative to its industry peers. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

Shares in Napatech have seen a strong upwards swing lately, which has really helped boost its P/S figure. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Napatech's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless these conditions change, they will continue to provide strong support to the share price.

Before you settle on your opinion, we've discovered 3 warning signs for Napatech (1 makes us a bit uncomfortable!) that you should be aware of.

If you're unsure about the strength of Napatech's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.