Charlotte's Web Holdings, Inc.'s (TSE:CWEB) 26% Share Price Plunge Could Signal Some Risk

The Charlotte's Web Holdings, Inc. (TSE:CWEB) share price has fared very poorly over the last month, falling by a substantial 26%. For any long-term shareholders, the last month ends a year to forget by locking in a 52% share price decline.

Even after such a large drop in price, you could still be forgiven for feeling indifferent about Charlotte's Web Holdings' P/S ratio of 0.3x, since the median price-to-sales (or "P/S") ratio for the Pharmaceuticals industry in Canada is also close to 0.8x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

Check out our latest analysis for Charlotte's Web Holdings

How Charlotte's Web Holdings Has Been Performing

While the industry has experienced revenue growth lately, Charlotte's Web Holdings' revenue has gone into reverse gear, which is not great. 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 Charlotte's Web Holdings will help you uncover what's on the horizon.

Do Revenue Forecasts Match The P/S Ratio?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Charlotte's Web Holdings' to be considered reasonable.

Retrospectively, the last year delivered a frustrating 20% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 46% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Shifting to the future, estimates from the one analyst covering the company suggest revenue growth is heading into negative territory, declining 0.1% over the next year. With the industry predicted to deliver 9.4% growth, that's a disappointing outcome.

With this information, we find it concerning that Charlotte's Web Holdings is trading at a fairly similar P/S compared to the industry. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as these declining revenues are likely to weigh on the share price eventually.

What We Can Learn From Charlotte's Web Holdings' P/S?

Charlotte's Web Holdings' plummeting stock price has brought its P/S back to a similar region as the rest of 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.

Our check of Charlotte's Web Holdings' analyst forecasts revealed that its outlook for shrinking revenue isn't bringing down its P/S as much as we would have predicted. When we see a gloomy outlook like this, our immediate thoughts are that the share price is at risk of declining, negatively impacting P/S. If the declining revenues were to materialize in the form of a declining share price, shareholders will be feeling the pinch.

And what about other risks? Every company has them, and we've spotted 4 warning signs for Charlotte's Web Holdings (of which 1 makes us a bit uncomfortable!) you should know about.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.