More Unpleasant Surprises Could Be In Store For 4Front Ventures Corp.'s (CSE:FFNT) Shares After Tumbling 29%

To the annoyance of some shareholders, 4Front Ventures Corp. (CSE:FFNT) shares are down a considerable 29% in the last month, which continues a horrid run for the company. For any long-term shareholders, the last month ends a year to forget by locking in a 80% share price decline.

Although its price has dipped substantially, it's still not a stretch to say that 4Front Ventures' price-to-sales (or "P/S") ratio of 0.4x right now seems quite "middle-of-the-road" compared to the Pharmaceuticals industry in Canada, where the median P/S ratio is around 0.8x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

See our latest analysis for 4Front Ventures

What Does 4Front Ventures' Recent Performance Look Like?

As an illustration, revenue has deteriorated at 4Front Ventures over the last year, which is not ideal at all. It might be that many expect the company to put the disappointing revenue performance behind them over the coming period, which has kept the P/S from falling. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

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 4Front Ventures' earnings, revenue and cash flow.

Is There Some Revenue Growth Forecasted For 4Front Ventures?

The only time you'd be comfortable seeing a P/S like 4Front Ventures' is when the company's growth is tracking the industry closely.

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 26%. The last three years don't look nice either as the company has shrunk revenue by 1.1% in aggregate. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 9.3% shows it's an unpleasant look.

With this information, we find it concerning that 4Front Ventures is trading at a fairly similar P/S compared to the industry. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

The Bottom Line On 4Front Ventures' P/S

With its share price dropping off a cliff, the P/S for 4Front Ventures looks to be in line with the rest of the Pharmaceuticals industry. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

The fact that 4Front Ventures currently trades at a P/S on par with the rest of the industry is surprising to us since its recent revenues have been in decline over the medium-term, all while the industry is set to grow. Even though it matches the industry, we're uncomfortable with the current P/S ratio, as this dismal revenue performance is unlikely to support a more positive sentiment for long. If recent medium-term revenue trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

You should always think about risks. Case in point, we've spotted 4 warning signs for 4Front Ventures you should be aware of, and 2 of them shouldn't be ignored.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.