Vireo Growth Inc.'s (CSE:VREO) 29% Dip Still Leaving Some Shareholders Feeling Restless Over Its P/SRatio

Vireo Growth Inc. (CSE:VREO) shares have had a horrible month, losing 29% after a relatively good period beforehand. Of course, over the longer-term many would still wish they owned shares as the stock's price has soared 134% in the last twelve months.

Although its price has dipped substantially, you could still be forgiven for feeling indifferent about Vireo Growth's P/S ratio of 0.8x, since the median price-to-sales (or "P/S") ratio for the Pharmaceuticals industry in Canada is also close to 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.

View our latest analysis for Vireo Growth

How Vireo Growth Has Been Performing

Vireo Growth certainly has been doing a good job lately as it's been growing revenue more than most other companies. One possibility is that the P/S ratio is moderate because investors think this strong revenue performance might be about to tail off. 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 analyst estimates for the company? Then our free report on Vireo Growth will help you uncover what's on the horizon.

Is There Some Revenue Growth Forecasted For Vireo Growth?

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

Retrospectively, the last year delivered an exceptional 27% gain to the company's top line. Pleasingly, revenue has also lifted 87% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Turning to the outlook, the next year should bring diminished returns, with revenue decreasing 1.3% as estimated by the one analyst watching the company. With the industry predicted to deliver 9.5% growth, that's a disappointing outcome.

With this in consideration, we think it doesn't make sense that Vireo Growth's P/S is closely matching its industry peers. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock right now. Only the boldest would assume these prices are sustainable as these declining revenues are likely to weigh on the share price eventually.

The Final Word

Following Vireo Growth's share price tumble, its P/S is just clinging on to the industry median P/S. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

While Vireo Growth's P/S isn't anything out of the ordinary for companies in the industry, we didn't expect it given forecasts of revenue decline. With this in mind, we don't feel the current P/S is justified as declining revenues are unlikely to support a more positive sentiment for long. If we consider the revenue outlook, the P/S seems to indicate that potential investors may be paying a premium for the stock.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Vireo Growth (at least 2 which are a bit concerning), and understanding them should be part of your investment process.

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.