Investors Appear Satisfied With Canopy Growth Corporation's (TSE:WEED) Prospects As Shares Rocket 40%

Those holding Canopy Growth Corporation (TSE:WEED) shares would be relieved that the share price has rebounded 40% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Still, the 30-day jump doesn't change the fact that longer term shareholders have seen their stock decimated by the 85% share price drop in the last twelve months.

Since its price has surged higher, you could be forgiven for thinking Canopy Growth is a stock not worth researching with a price-to-sales ratios (or "P/S") of 1.3x, considering almost half the companies in Canada's Pharmaceuticals industry have P/S ratios below 0.7x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

Our free stock report includes 3 warning signs investors should be aware of before investing in Canopy Growth. Read for free now.

View our latest analysis for Canopy Growth

What Does Canopy Growth's P/S Mean For Shareholders?

While the industry has experienced revenue growth lately, Canopy Growth's revenue has gone into reverse gear, which is not great. Perhaps the market is expecting the poor revenue to reverse, justifying it's current high P/S.. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

Is There Enough Revenue Growth Forecasted For Canopy Growth?

Canopy Growth's P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

Retrospectively, the last year delivered a frustrating 5.4% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 50% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Looking ahead now, revenue is anticipated to climb by 7.1% per annum during the coming three years according to the eight analysts following the company. With the industry only predicted to deliver 3.2% per annum, the company is positioned for a stronger revenue result.

With this information, we can see why Canopy Growth is trading at such a high P/S compared to the industry. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

Canopy Growth's P/S is on the rise since its shares have risen strongly. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our look into Canopy Growth shows that its P/S ratio remains high on the merit of its strong future revenues. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

It is also worth noting that we have found 3 warning signs for Canopy Growth (1 is concerning!) that you need to take into consideration.

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.