Investors Don't See Light At End Of Cresco Labs Inc.'s (CSE:CL) Tunnel And Push Stock Down 32%

Cresco Labs Inc. (CSE:CL) shareholders won't be pleased to see that the share price has had a very rough month, dropping 32% and undoing the prior period's positive performance. Longer-term shareholders would now have taken a real hit with the stock declining 5.6% in the last year.

After such a large drop in price, given about half the companies operating in Canada's Pharmaceuticals industry have price-to-sales ratios (or "P/S") above 1.4x, you may consider Cresco Labs as an attractive investment with its 0.8x P/S ratio. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Cresco Labs

What Does Cresco Labs' Recent Performance Look Like?

Cresco Labs could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. Perhaps the P/S remains low as investors think the prospects of strong revenue growth aren't on the horizon. So while you could say the stock is cheap, investors will be looking for improvement before they see it as good value.

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 Low P/S?

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

Retrospectively, the last year delivered a frustrating 8.9% decrease to the company's top line. Still, the latest three year period has seen an excellent 122% overall rise in revenue, in spite of its unsatisfying short-term performance. So we can start by confirming that the company has generally done a very good job of growing revenue over that time, even though it had some hiccups along the way.

Shifting to the future, estimates from the analysts covering the company suggest revenue should grow by 3.9% per annum over the next three years. With the industry predicted to deliver 9.2% growth per year, the company is positioned for a weaker revenue result.

With this in consideration, its clear as to why Cresco Labs' P/S is falling short industry peers. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

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

Cresco Labs' recently weak share price has pulled its P/S back below other Pharmaceuticals companies. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Cresco Labs' analyst forecasts revealed that its inferior revenue outlook is contributing to its low P/S. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

It is also worth noting that we have found 4 warning signs for Cresco Labs that you need to take into consideration.

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.