Adastra Holdings Ltd.'s (CSE:XTRX) Shares Not Telling The Full Story

With a median price-to-sales (or "P/S") ratio of close to 1x in the Pharmaceuticals industry in Canada, you could be forgiven for feeling indifferent about Adastra Holdings Ltd.'s (CSE:XTRX) P/S ratio of 0.5x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

Check out our latest analysis for Adastra Holdings

How Has Adastra Holdings Performed Recently?

With revenue growth that's exceedingly strong of late, Adastra Holdings has been doing very well. It might be that many expect the strong revenue performance to wane, which has kept the share price, and thus the P/S ratio, from rising. If that doesn't eventuate, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

Although there are no analyst estimates available for Adastra Holdings, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Adastra Holdings' Revenue Growth Trending?

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

Retrospectively, the last year delivered an exceptional 92% gain to the company's top line. Spectacularly, three year revenue growth has ballooned by several orders of magnitude, thanks in part to the last 12 months of revenue growth. So we can start by confirming that the company has done a tremendous job of growing revenue over that time.

Comparing that recent medium-term revenue trajectory with the industry's one-year growth forecast of 5.1% shows it's noticeably more attractive.

In light of this, it's curious that Adastra Holdings' P/S sits in line with the majority of other companies. It may be that most investors are not convinced the company can maintain its recent growth rates.

The Final Word

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've established that Adastra Holdings currently trades on a lower than expected P/S since its recent three-year growth is higher than the wider industry forecast. There could be some unobserved threats to revenue preventing the P/S ratio from matching this positive performance. At least the risk of a price drop looks to be subdued if recent medium-term revenue trends continue, but investors seem to think future revenue could see some volatility.

You need to take note of risks, for example - Adastra Holdings has 3 warning signs (and 2 which shouldn't be ignored) we think you should know about.

If these risks are making you reconsider your opinion on Adastra Holdings, 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.