Cronos Group Inc.'s (TSE:CRON) 26% Share Price Surge Not Quite Adding Up

Cronos Group Inc. (TSE:CRON) shareholders would be excited to see that the share price has had a great month, posting a 26% gain and recovering from prior weakness. Unfortunately, despite the strong performance over the last month, the full year gain of 3.9% isn't as attractive.

Since its price has surged higher, you could be forgiven for thinking Cronos Group is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 7.4x, considering almost half the companies in Canada's Pharmaceuticals industry have P/S ratios below 0.9x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

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See our latest analysis for Cronos Group

How Has Cronos Group Performed Recently?

With revenue growth that's superior to most other companies of late, Cronos Group has been doing relatively well. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

Is There Enough Revenue Growth Forecasted For Cronos Group?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Cronos Group's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 28% gain to the company's top line. The strong recent performance means it was also able to grow revenue by 44% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Turning to the outlook, the next three years should generate growth of 6.5% per year as estimated by the three analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 4.7% per year, which is not materially different.

With this in consideration, we find it intriguing that Cronos Group's P/S is higher than its industry peers. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for disappointment if the P/S falls to levels more in line with the growth outlook.

The Final Word

Cronos Group's P/S has grown nicely over the last month thanks to a handy boost in the share price. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Given Cronos Group's future revenue forecasts are in line with the wider industry, the fact that it trades at an elevated P/S is somewhat surprising. Right now we are uncomfortable with the relatively high share price as the predicted future revenues aren't likely to support such positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for Cronos Group with six simple checks will allow you to discover any risks that could be an issue.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.