Trulieve Cannabis Corp.'s (CSE:TRUL) Shares Climb 55% But Its Business Is Yet to Catch Up

Trulieve Cannabis Corp. (CSE:TRUL) shareholders would be excited to see that the share price has had a great month, posting a 55% gain and recovering from prior weakness. Looking back a bit further, it's encouraging to see the stock is up 70% in the last year.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about Trulieve Cannabis' P/S ratio of 1.2x, since the median price-to-sales (or "P/S") ratio for the Pharmaceuticals industry in Canada is also close to 1.1x. 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.

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View our latest analysis for Trulieve Cannabis

How Has Trulieve Cannabis Performed Recently?

Trulieve Cannabis could be doing better as it's been growing revenue less than most other companies lately. One possibility is that the P/S ratio is moderate because investors think this lacklustre revenue performance will turn around. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

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

Do Revenue Forecasts Match The P/S Ratio?

Trulieve Cannabis' P/S ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with 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. Whilst it's an improvement, it wasn't enough to get the company out of the hole it was in, with revenue down 2.9% overall from three years ago. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Turning to the outlook, the next three years should generate growth of 2.5% per year as estimated by the eight analysts watching the company. That's shaping up to be materially lower than the 5.8% each year growth forecast for the broader industry.

With this in mind, we find it intriguing that Trulieve Cannabis' P/S is closely matching its industry peers. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

The Key Takeaway

Its shares have lifted substantially and now Trulieve Cannabis' P/S is back within range of the industry median. 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.

When you consider that Trulieve Cannabis' revenue growth estimates are fairly muted compared to the broader industry, it's easy to see why we consider it unexpected to be trading at its current P/S ratio. At present, we aren't confident in the P/S as the predicted future revenues aren't likely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

You need to take note of risks, for example - Trulieve Cannabis has 2 warning signs (and 1 which is concerning) we think you should know about.

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.