Delta 9 Cannabis Inc. (TSE:DN) Not Doing Enough For Some Investors As Its Shares Slump 27%

Delta 9 Cannabis Inc. (TSE:DN) shareholders won't be pleased to see that the share price has had a very rough month, dropping 27% and undoing the prior period's positive performance. For any long-term shareholders, the last month ends a year to forget by locking in a 65% share price decline.

After such a large drop in price, Delta 9 Cannabis' price-to-earnings (or "P/E") ratio of -0.4x might make it look like a strong buy right now compared to the market in Canada, where around half of the companies have P/E ratios above 12x and even P/E's above 27x are quite common. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

For instance, Delta 9 Cannabis' receding earnings in recent times would have to be some food for thought. One possibility is that the P/E is low because investors think the company won't do enough to avoid underperforming the broader market in the near future. 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 out of favour.

View our latest analysis for Delta 9 Cannabis

Although there are no analyst estimates available for Delta 9 Cannabis, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

What Are Growth Metrics Telling Us About The Low P/E?

Delta 9 Cannabis' P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 78%. At least EPS has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 11% shows it's noticeably less attractive on an annualised basis.

With this information, we can see why Delta 9 Cannabis is trading at a P/E lower than the market. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

The Key Takeaway

Shares in Delta 9 Cannabis have plummeted and its P/E is now low enough to touch the ground. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Delta 9 Cannabis maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Don't forget that there may be other risks. For instance, we've identified 6 warning signs for Delta 9 Cannabis (3 are significant) you should be aware of.

If you're unsure about the strength of Delta 9 Cannabis' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.