Cresco Labs Inc.'s (CSE:CL) Shares Climb 31% But Its Business Is Yet to Catch Up

Cresco Labs Inc. (CSE:CL) shareholders would be excited to see that the share price has had a great month, posting a 31% gain and recovering from prior weakness. But the last month did very little to improve the 55% share price decline over the last year.

Although its price has surged higher, there still wouldn't be many who think Cresco Labs' price-to-sales (or "P/S") ratio of 0.5x is worth a mention when the median P/S in Canada's Pharmaceuticals industry is similar at about 0.8x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

Our free stock report includes 2 warning signs investors should be aware of before investing in Cresco Labs. Read for free now.

View our latest analysis for Cresco Labs

What Does Cresco Labs' P/S Mean For Shareholders?

While the industry has experienced revenue growth lately, Cresco Labs' revenue has gone into reverse gear, which is not great. One possibility is that the P/S ratio is moderate because investors think this poor revenue performance will turn around. However, if this isn't the case, investors might get caught out paying too much for the stock.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Cresco Labs.

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

Cresco Labs' P/S ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the industry.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 5.3%. This means it has also seen a slide in revenue over the longer-term as revenue is down 11% 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.

Shifting to the future, estimates from the eight analysts covering the company suggest revenue growth is heading into negative territory, declining 0.4% per annum over the next three years. Meanwhile, the broader industry is forecast to expand by 7.1% per year, which paints a poor picture.

With this information, we find it concerning that Cresco Labs is trading at a fairly similar P/S compared to the industry. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as these declining revenues are likely to weigh on the share price eventually.

What We Can Learn From Cresco Labs' P/S?

Cresco Labs appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry 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.

While Cresco Labs' P/S isn't anything out of the ordinary for companies in the industry, we didn't expect it given forecasts of revenue decline. When we see a gloomy outlook like this, our immediate thoughts are that the share price is at risk of declining, negatively impacting P/S. If the poor revenue outlook tells us one thing, it's that these current price levels could be unsustainable.

It is also worth noting that we have found 2 warning signs for Cresco Labs that you need to take into consideration.

If these risks are making you reconsider your opinion on Cresco Labs, explore our interactive list of high quality stocks to get an idea of what else is out there.

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