Why Investors Shouldn't Be Surprised By Napatech A/S' (OB:NAPA) 27% Share Price Surge

The Napatech A/S (OB:NAPA) share price has done very well over the last month, posting an excellent gain of 27%. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 36% over that time.

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 1.2x, you may consider Napatech as a stock to avoid entirely with its 13.7x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

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See our latest analysis for Napatech

What Does Napatech's Recent Performance Look Like?

Recent times haven't been great for Napatech as its revenue has been falling quicker than most other companies. Perhaps the market is predicting a change in fortunes for the company and is expecting them to blow past the rest of the industry, elevating the P/S ratio. If not, then existing shareholders may be very nervous about the viability of the share price.

Want the full picture on analyst estimates for the company? Then our free report on Napatech will help you uncover what's on the horizon.

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

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 29%. This means it has also seen a slide in revenue over the longer-term as revenue is down 41% 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 124% during the coming year according to the lone analyst following the company. That's shaping up to be materially higher than the 5.7% growth forecast for the broader industry.

With this information, we can see why Napatech is trading at such a high P/S compared to the industry. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

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.

Many other vital risk factors can be found on the company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Napatech with six simple checks.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.