Revenues Tell The Story For Canopy Growth Corporation (TSE:WEED) As Its Stock Soars 70%

Canopy Growth Corporation (TSE:WEED) shares have had a really impressive month, gaining 70% after a shaky period beforehand. Still, the 30-day jump doesn't change the fact that longer term shareholders have seen their stock decimated by the 65% share price drop in the last twelve months.

After such a large jump in price, you could be forgiven for thinking Canopy Growth is a stock not worth researching with a price-to-sales ratios (or "P/S") of 2.2x, considering almost half the companies in Canada's Pharmaceuticals industry have P/S ratios below 1x. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

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Check out our latest analysis for Canopy Growth

How Has Canopy Growth Performed Recently?

Canopy Growth hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. One possibility is that the P/S ratio is high because investors think this poor revenue performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

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

Is There Enough Revenue Growth Forecasted For Canopy Growth?

In order to justify its P/S ratio, Canopy Growth would need to produce impressive growth in excess of 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 4.2%. This means it has also seen a slide in revenue over the longer-term as revenue is down 41% 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 7.7% per year during the coming three years according to the five analysts following the company. With the industry only predicted to deliver 4.8% per annum, the company is positioned for a stronger revenue result.

In light of this, it's understandable that Canopy Growth's P/S sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What We Can Learn From Canopy Growth's P/S?

Canopy Growth shares have taken a big step in a northerly direction, but its P/S is elevated as a result. 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.

As we suspected, our examination of Canopy Growth's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

You need to take note of risks, for example - Canopy Growth has 4 warning signs (and 2 which are potentially serious) we think you should know about.

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.