Further Upside For MTL Cannabis Corp. (CSE:MTLC) Shares Could Introduce Price Risks After 27% Bounce

Those holding MTL Cannabis Corp. (CSE:MTLC) shares would be relieved that the share price has rebounded 27% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Looking back a bit further, it's encouraging to see the stock is up 95% in the last year.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about MTL Cannabis' P/S ratio of 0.7x, since the median price-to-sales (or "P/S") ratio for the Pharmaceuticals industry in Canada is about the same. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

We've discovered 4 warning signs about MTL Cannabis. View them for free.

Check out our latest analysis for MTL Cannabis

How Has MTL Cannabis Performed Recently?

Revenue has risen firmly for MTL Cannabis recently, which is pleasing to see. One possibility is that the P/S is moderate because investors think this respectable revenue growth might not be enough to outperform the broader industry in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on MTL Cannabis will help you shine a light on its historical performance.

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

In order to justify its P/S ratio, MTL Cannabis would need to produce growth that's similar to the industry.

Taking a look back first, we see that the company grew revenue by an impressive 27% last year. The strong recent performance means it was also able to grow revenue by 241% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Comparing that recent medium-term revenue trajectory with the industry's one-year growth forecast of 8.2% shows it's noticeably more attractive.

With this information, we find it interesting that MTL Cannabis is trading at a fairly similar P/S compared to the industry. It may be that most investors are not convinced the company can maintain its recent growth rates.

The Key Takeaway

MTL Cannabis 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.

We didn't quite envision MTL Cannabis' P/S sitting in line with the wider industry, considering the revenue growth over the last three-year is higher than the current industry outlook. When we see strong revenue with faster-than-industry growth, we can only assume potential risks are what might be placing pressure on the P/S ratio. While recent revenue trends over the past medium-term suggest that the risk of a price decline is low, investors appear to see the likelihood of revenue fluctuations in the future.

Having said that, be aware MTL Cannabis is showing 4 warning signs in our investment analysis, and 2 of those are significant.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.