Trulieve Cannabis Corp.'s (CSE:TRUL) Shares Climb 97% But Its Business Is Yet to Catch Up

Trulieve Cannabis Corp. (CSE:TRUL) shares have continued their recent momentum with a 97% gain in the last month alone. Notwithstanding the latest gain, the annual share price return of 7.5% isn't as impressive.

Even after such a large jump in price, there still wouldn't be many who think Trulieve Cannabis' price-to-sales (or "P/S") ratio of 1.5x is worth a mention when the median P/S in Canada's Pharmaceuticals industry is similar at about 1.1x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

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See our latest analysis for Trulieve Cannabis

What Does Trulieve Cannabis' P/S Mean For Shareholders?

With revenue growth that's inferior to most other companies of late, Trulieve Cannabis has been relatively sluggish. One possibility is that the P/S ratio is moderate because investors think this lacklustre revenue performance will turn around. However, if this isn't the case, investors might get caught out paying too much for the stock.

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Do Revenue Forecasts Match The P/S Ratio?

The only time you'd be comfortable seeing a P/S like Trulieve Cannabis' is when the company's growth is tracking the industry closely.

If we review the last year of revenue, the company posted a result that saw barely any deviation from a year ago. The longer-term trend has been no better as the company has no revenue growth to show for over the last three years either. Therefore, it's fair to say that revenue growth has definitely eluded the company recently.

Shifting to the future, estimates from the nine analysts covering the company suggest revenue should grow by 1.7% per year over the next three years. With the industry predicted to deliver 4.9% growth per annum, the company is positioned for a weaker revenue result.

With this in mind, we find it intriguing that Trulieve Cannabis' P/S is closely matching its industry peers. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

The Bottom Line On Trulieve Cannabis' P/S

Trulieve 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.

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. Circumstances like this present a risk to current and prospective investors who may see share prices fall if the low revenue growth impacts the sentiment.

Before you settle on your opinion, we've discovered 2 warning signs for Trulieve Cannabis that you should be aware of.

If these risks are making you reconsider your opinion on Trulieve Cannabis, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.