Planet 13 Holdings Inc. (CSE:PLTH) Stocks Shoot Up 26% But Its P/S Still Looks Reasonable

Planet 13 Holdings Inc. (CSE:PLTH) shareholders would be excited to see that the share price has had a great month, posting a 26% gain and recovering from prior weakness. The last 30 days bring the annual gain to a very sharp 36%.

Following the firm bounce in price, when almost half of the companies in Canada's Pharmaceuticals industry have price-to-sales ratios (or "P/S") below 1.1x, you may consider Planet 13 Holdings as a stock probably not worth researching with its 2x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

View our latest analysis for Planet 13 Holdings

How Planet 13 Holdings Has Been Performing

With revenue growth that's inferior to most other companies of late, Planet 13 Holdings has been relatively sluggish. One possibility is that the P/S ratio is high because investors think this lacklustre revenue performance will improve markedly. 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 Planet 13 Holdings.

Is There Enough Revenue Growth Forecasted For Planet 13 Holdings?

The only time you'd be truly comfortable seeing a P/S as high as Planet 13 Holdings' is when the company's growth is on track to outshine the industry.

Taking a look back first, we see that there was hardly any revenue growth to speak of for the company over the past year. That's essentially a continuation of what we've seen over the last three years, as its revenue growth has been virtually non-existent for that entire period. So it seems apparent to us that the company has struggled to grow revenue meaningfully over that time.

Shifting to the future, estimates from the dual analysts covering the company suggest revenue should grow by 49% over the next year. With the industry only predicted to deliver 9.1%, the company is positioned for a stronger revenue result.

In light of this, it's understandable that Planet 13 Holdings' P/S sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

Planet 13 Holdings shares have taken a big step in a northerly direction, but its P/S is elevated as a result. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of Planet 13 Holdings' analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

Having said that, be aware Planet 13 Holdings is showing 3 warning signs in our investment analysis, and 2 of those can't be ignored.

If you're unsure about the strength of Planet 13 Holdings' 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.