Even With A 200% Surge, Cautious Investors Are Not Rewarding StateHouse Holdings Inc.'s (CSE:STHZ) Performance Completely

StateHouse Holdings Inc. (CSE:STHZ) shareholders would be excited to see that the share price has had a great month, posting a 200% gain and recovering from prior weakness. But the last month did very little to improve the 72% share price decline over the last year.

Although its price has surged higher, StateHouse Holdings may still be sending bullish signals at the moment with its price-to-sales (or "P/S") ratio of 0.1x, since almost half of all companies in the Pharmaceuticals industry in Canada have P/S ratios greater than 0.9x and even P/S higher than 3x are not unusual. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

Check out our latest analysis for StateHouse Holdings

What Does StateHouse Holdings' P/S Mean For Shareholders?

With revenue growth that's exceedingly strong of late, StateHouse Holdings has been doing very well. One possibility is that the P/S ratio is low because investors think this strong revenue growth might actually underperform the broader industry in the near future. Those who are bullish on StateHouse Holdings will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

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

Do Revenue Forecasts Match The Low P/S Ratio?

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

Retrospectively, the last year delivered an exceptional 78% gain to the company's top line. The latest three year period has also seen an excellent 131% overall rise in revenue, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing revenue over that time.

This is in contrast to the rest of the industry, which is expected to grow by 5.6% over the next year, materially lower than the company's recent medium-term annualised growth rates.

In light of this, it's peculiar that StateHouse Holdings' P/S sits below the majority of other companies. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

The Final Word

The latest share price surge wasn't enough to lift StateHouse Holdings' P/S close to the industry median. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We're very surprised to see StateHouse Holdings currently trading on a much lower than expected P/S since its recent three-year growth is higher than the wider industry forecast. When we see strong revenue with faster-than-industry growth, we assume there are some significant underlying risks to the company's ability to make money which is applying downwards pressure on the P/S ratio. It appears many are indeed anticipating revenue instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

Before you take the next step, you should know about the 5 warning signs for StateHouse Holdings (4 can't be ignored!) that we have uncovered.

If you're unsure about the strength of StateHouse Holdings' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.