Leef Brands Inc. (CSE:LEEF) Might Not Be As Mispriced As It Looks After Plunging 27%

The Leef Brands Inc. (CSE:LEEF) share price has fared very poorly over the last month, falling by a substantial 27%. Indeed, the recent drop has reduced its annual gain to a relatively sedate 7.5% over the last twelve months.

After such a large drop in price, Leef Brands may be sending bullish signals at the moment with its price-to-sales (or "P/S") ratio of 0.9x, since almost half of all companies in the Personal Products industry in Canada have P/S ratios greater than 2.1x and even P/S higher than 5x are not unusual. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

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See our latest analysis for Leef Brands

What Does Leef Brands' P/S Mean For Shareholders?

Leef Brands has been doing a good job lately as it's been growing revenue at a solid pace. One possibility is that the P/S is low because investors think this respectable revenue growth might actually underperform the broader industry in the near future. If that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction of the share price.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Leef Brands' earnings, revenue and cash flow.

Do Revenue Forecasts Match The Low P/S Ratio?

In order to justify its P/S ratio, Leef Brands would need to produce sluggish growth that's trailing the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 14% last year. The solid recent performance means it was also able to grow revenue by 16% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

It's interesting to note that the rest of the industry is similarly expected to grow by 5.2% over the next year, which is fairly even with the company's recent medium-term annualised growth rates.

With this information, we find it odd that Leef Brands is trading at a P/S lower than the industry. It may be that most investors are not convinced the company can maintain recent growth rates.

What Does Leef Brands' P/S Mean For Investors?

The southerly movements of Leef Brands' shares means its P/S is now sitting at a pretty low level. 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.

The fact that Leef Brands currently trades at a low P/S relative to the industry is unexpected considering its recent three-year growth is in line with the wider industry forecast. There could be some unobserved threats to revenue preventing the P/S ratio from matching the company's performance. revenue trends suggest that the risk of a price decline is low, investors appear to perceive a possibility of revenue volatility in the future.

There are also other vital risk factors to consider and we've discovered 5 warning signs for Leef Brands (3 don't sit too well with us!) that you should be aware of before investing here.

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