Improved Revenues Required Before Little Green Pharma Ltd (ASX:LGP) Shares Find Their Feet

You may think that with a price-to-sales (or "P/S") ratio of 1.6x Little Green Pharma Ltd (ASX:LGP) is definitely a stock worth checking out, seeing as almost half of all the Pharmaceuticals companies in Australia have P/S ratios greater than 5.5x and even P/S above 29x aren't out of the ordinary. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so limited.

View our latest analysis for Little Green Pharma

What Does Little Green Pharma's P/S Mean For Shareholders?

Little Green Pharma could be doing better as it's been growing revenue less than most other companies lately. It seems that many are expecting the uninspiring revenue performance to persist, which has repressed the growth of the P/S ratio. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

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

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

Little Green Pharma's P/S ratio would be typical for a company that's expected to deliver very poor growth or even falling revenue, and importantly, perform much worse than the industry.

Taking a look back first, we see that the company grew revenue by an impressive 29% last year. Spectacularly, three year revenue growth has ballooned by several orders of magnitude, thanks in part to the last 12 months of revenue growth. Accordingly, shareholders would have been over the moon with those medium-term rates of revenue growth.

Shifting to the future, estimates from the lone analyst covering the company suggest revenue should grow by 16% over the next year. Meanwhile, the rest of the industry is forecast to expand by 131%, which is noticeably more attractive.

In light of this, it's understandable that Little Green Pharma's P/S sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

What Does Little Green Pharma's P/S Mean For Investors?

It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Little Green Pharma maintains its low P/S on the weakness of its forecast growth being lower than the wider industry, as expected. Shareholders' pessimism on the revenue prospects for the company seems to be the main contributor to the depressed P/S. It's hard to see the share price rising strongly in the near future under these circumstances.

Before you take the next step, you should know about the 2 warning signs for Little Green Pharma that we have uncovered.

If you're unsure about the strength of Little Green Pharma'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.