More Unpleasant Surprises Could Be In Store For Canopy Growth Corporation's (TSE:WEED) Shares After Tumbling 28%

Unfortunately for some shareholders, the Canopy Growth Corporation (TSE:WEED) share price has dived 28% in the last thirty days, prolonging recent pain. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 86% loss during that time.

In spite of the heavy fall in price, there still wouldn't be many who think Canopy Growth's price-to-sales (or "P/S") ratio of 1.1x is worth a mention when it essentially matches the median P/S in Canada's Pharmaceuticals industry. 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.

Check out our latest analysis for Canopy Growth

How Has Canopy Growth Performed Recently?

While the industry has experienced revenue growth lately, Canopy Growth's revenue has gone into reverse gear, which is not great. One possibility is that the P/S ratio is moderate because investors think this poor revenue performance will turn around. If not, then existing shareholders may be a little nervous about the viability of the share price.

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

Is There Some Revenue Growth Forecasted For Canopy Growth?

Canopy Growth's P/S ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the industry.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 1.2%. As a result, revenue from three years ago have also fallen 28% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Shifting to the future, estimates from the ten analysts covering the company suggest revenue growth is heading into negative territory, declining 2.4% per annum over the next three years. With the industry predicted to deliver 8.0% growth each year, that's a disappointing outcome.

In light of this, it's somewhat alarming that Canopy Growth's P/S sits in line with the majority of other companies. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock right now. 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 Bottom Line On Canopy Growth's P/S

Following Canopy Growth's share price tumble, its P/S is just clinging on to the industry median P/S. 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 check of Canopy Growth's analyst forecasts revealed that its outlook for shrinking revenue isn't bringing down its P/S as much as we would have predicted. With this in mind, we don't feel the current P/S is justified as declining revenues are unlikely to support a more positive sentiment for long. If we consider the revenue outlook, the P/S seems to indicate that potential investors may be paying a premium for the stock.

You need to take note of risks, for example - Canopy Growth has 3 warning signs (and 1 which is potentially serious) we think you should know about.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.