Investors Holding Back On Aurora Cannabis Inc. (TSE:ACB)

With a median price-to-sales (or "P/S") ratio of close to 0.9x in the Pharmaceuticals industry in Canada, you could be forgiven for feeling indifferent about Aurora Cannabis Inc.'s (TSE:ACB) P/S ratio of 1.2x. 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 Aurora Cannabis

How Aurora Cannabis Has Been Performing

Aurora Cannabis could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. One possibility is that the P/S ratio is moderate because investors think this poor 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.

Want the full picture on analyst estimates for the company? Then our free report on Aurora Cannabis will help you uncover what's on the horizon.

How Is Aurora Cannabis' Revenue Growth Trending?

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

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 8.3%. This means it has also seen a slide in revenue over the longer-term as revenue is down 27% in total over the last three years. 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 23% each year as estimated by the eight analysts watching the company. With the industry only predicted to deliver 20% each year, the company is positioned for a stronger revenue result.

In light of this, it's curious that Aurora Cannabis' P/S sits in line with the majority of other companies. It may be that most investors aren't convinced the company can achieve future growth expectations.

The Key Takeaway

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.

We've established that Aurora Cannabis currently trades on a lower than expected P/S since its forecasted revenue growth is higher than the wider industry. When we see a strong revenue outlook, with growth outpacing the industry, we can only assume potential uncertainty around these figures are what might be placing slight pressure on the P/S ratio. This uncertainty seems to be reflected in the share price which, while stable, could be higher given the revenue forecasts.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Aurora Cannabis 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.