Further Upside For Lowell Farms Inc. (CSE:LOWL) Shares Could Introduce Price Risks After 33% Bounce

Lowell Farms Inc. (CSE:LOWL) shareholders are no doubt pleased to see that the share price has bounced 33% in the last month, although it is still struggling to make up recently lost ground. Still, the 30-day jump doesn't change the fact that longer term shareholders have seen their stock decimated by the 87% share price drop in the last twelve months.

Although its price has surged higher, when close to half the companies operating in Canada's Pharmaceuticals industry have price-to-sales ratios (or "P/S") above 1x, you may still consider Lowell Farms as an enticing stock to check out with its 0.1x P/S ratio. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Lowell Farms

How Has Lowell Farms Performed Recently?

While the industry has experienced revenue growth lately, Lowell Farms' revenue has gone into reverse gear, which is not great. The P/S ratio is probably low because investors think this poor revenue performance isn't going to get any better. If you still like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

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

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

The only time you'd be truly comfortable seeing a P/S as low as Lowell Farms' is when the company's growth is on track to lag the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 19%. That put a dampener on the good run it was having over the longer-term as its three-year revenue growth is still a noteworthy 18% in total. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 34% during the coming year according to the one analyst following the company. That's shaping up to be materially higher than the 11% growth forecast for the broader industry.

With this information, we find it odd that Lowell Farms is trading at a P/S lower than the industry. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

The Final Word

Lowell Farms' stock price has surged recently, but its but its P/S still remains modest. 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.

Lowell Farms' analyst forecasts revealed that its superior revenue outlook isn't contributing to its P/S anywhere near as much as we would have predicted. When we see strong growth forecasts like this, we can only assume potential risks are what might be placing significant pressure on the P/S ratio. While the possibility of the share price plunging seems unlikely due to the high growth forecasted for the company, the market does appear to have some hesitation.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 6 warning signs with Lowell Farms (at least 4 which don't sit too well with us), and understanding them should be part of your investment process.

If you're unsure about the strength of Lowell Farms' 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.