TerrAscend Corp.'s (TSE:TSND) Shares Climb 123% But Its Business Is Yet to Catch Up

TerrAscend Corp. (TSE:TSND) shares have had a really impressive month, gaining 123% after a shaky period beforehand. The last 30 days bring the annual gain to a very sharp 46%.

Although its price has surged higher, there still wouldn't be many who think TerrAscend's price-to-sales (or "P/S") ratio of 0.9x is worth a mention when the median P/S in Canada's Pharmaceuticals industry is similar at about 1x. 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.

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Check out our latest analysis for TerrAscend

What Does TerrAscend's Recent Performance Look Like?

With revenue growth that's inferior to most other companies of late, TerrAscend has been relatively sluggish. It might be that many expect the uninspiring revenue performance to strengthen positively, which has kept the P/S ratio from falling. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

Keen to find out how analysts think TerrAscend's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Some Revenue Growth Forecasted For TerrAscend?

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

Retrospectively, the last year delivered a decent 3.9% gain to the company's revenues. Pleasingly, revenue has also lifted 41% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Turning to the outlook, the next three years should bring diminished returns, with revenue decreasing 0.9% per annum as estimated by the four analysts watching the company. That's not great when the rest of the industry is expected to grow by 5.9% per year.

In light of this, it's somewhat alarming that TerrAscend's P/S sits in line with the majority of other companies. 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. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the negative growth outlook.

The Final Word

Its shares have lifted substantially and now TerrAscend's P/S is back within range of the industry median. 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.

Our check of TerrAscend's 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 we consider the revenue outlook, the P/S seems to indicate that potential investors may be paying a premium for the stock.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with TerrAscend (at least 1 which is concerning), and understanding these should be part of your investment process.

If these risks are making you reconsider your opinion on TerrAscend, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.