What You Can Learn From TerrAscend Corp.'s (TSE:TSND) P/SAfter Its 25% Share Price Crash

The TerrAscend Corp. (TSE:TSND) share price has softened a substantial 25% over the previous 30 days, handing back much of the gains the stock has made lately. Indeed, the recent drop has reduced its annual gain to a relatively sedate 4.3% over the last twelve months.

Even after such a large drop in price, there still wouldn't be many who think TerrAscend's price-to-sales (or "P/S") ratio of 1.6x is worth a mention when the median P/S in Canada's Pharmaceuticals industry is similar at about 1.2x. 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.

See our latest analysis for TerrAscend

How TerrAscend Has Been Performing

With revenue growth that's superior to most other companies of late, TerrAscend has been doing relatively well. It might be that many expect the strong revenue performance to wane, which has kept the P/S ratio from rising. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

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

Is There Some Revenue Growth Forecasted For TerrAscend?

In order to justify its P/S ratio, TerrAscend would need to produce growth that's similar to the industry.

Taking a look back first, we see that the company grew revenue by an impressive 42% last year. The latest three year period has also seen an excellent 155% overall rise in revenue, aided by its short-term performance. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Looking ahead now, revenue is anticipated to climb by 11% per annum during the coming three years according to the eight analysts following the company. With the industry predicted to deliver 10% growth per annum, the company is positioned for a comparable revenue result.

In light of this, it's understandable that TerrAscend's P/S sits in line with the majority of other companies. It seems most investors are expecting to see average future growth and are only willing to pay a moderate amount for the stock.

What We Can Learn From TerrAscend's P/S?

Following TerrAscend's share price tumble, its P/S is just clinging on to the industry median P/S. 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.

We've seen that TerrAscend maintains an adequate P/S seeing as its revenue growth figures match the rest of the industry. Right now shareholders are comfortable with the P/S as they are quite confident future revenue won't throw up any surprises. If all things remain constant, the possibility of a drastic share price movement remains fairly remote.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for TerrAscend with six simple checks on some of these key factors.

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.