Stock Analysis

It's Down 29% But Delta 9 Cannabis Inc. (TSE:DN) Could Be Riskier Than It Looks

TSX:DN
Source: Shutterstock

Delta 9 Cannabis Inc. (TSE:DN) shares have retraced a considerable 29% in the last month, reversing a fair amount of their solid recent performance. For any long-term shareholders, the last month ends a year to forget by locking in a 55% share price decline.

Following the heavy fall in price, when close to half the companies operating in Canada's Pharmaceuticals industry have price-to-sales ratios (or "P/S") above 1.5x, you may consider Delta 9 Cannabis as an enticing stock to check out with its 0.1x P/S ratio. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Delta 9 Cannabis

ps-multiple-vs-industry
TSX:DN Price to Sales Ratio vs Industry May 10th 2024

What Does Delta 9 Cannabis' P/S Mean For Shareholders?

Delta 9 Cannabis certainly has been doing a good job lately as it's been growing revenue more than most other companies. It might be that many expect the strong revenue performance to degrade substantially, which has repressed the share price, and thus the P/S ratio. If the company manages to stay the course, then investors should be rewarded with a share price that matches its revenue figures.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Delta 9 Cannabis.

Do Revenue Forecasts Match The Low P/S Ratio?

Delta 9 Cannabis' P/S ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 12% last year. This was backed up an excellent period prior to see revenue up by 37% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenues over that time.

Shifting to the future, estimates from the sole analyst covering the company suggest revenue should grow by 6.7% over the next year. That's shaping up to be similar to the 5.2% growth forecast for the broader industry.

In light of this, it's peculiar that Delta 9 Cannabis' P/S sits below the majority of other companies. It may be that most investors are not convinced the company can achieve future growth expectations.

What Does Delta 9 Cannabis' P/S Mean For Investors?

The southerly movements of Delta 9 Cannabis' shares means its P/S is now sitting at a pretty low level. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Delta 9 Cannabis' revealed that its P/S remains low despite analyst forecasts of revenue growth matching the wider industry. Despite average revenue growth estimates, there could be some unobserved threats keeping the P/S low. It appears some are indeed anticipating revenue instability, because these conditions should normally provide more support to the share price.

Plus, you should also learn about these 5 warning signs we've spotted with Delta 9 Cannabis.

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.

New: Manage All Your Stock Portfolios in One Place

We've created the ultimate portfolio companion for stock investors, and it's free.

• Connect an unlimited number of Portfolios and see your total in one currency
• Be alerted to new Warning Signs or Risks via email or mobile
• Track the Fair Value of your stocks

Try a Demo Portfolio for Free

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.