Auxly Cannabis Group Inc. (TSE:XLY) Stocks Shoot Up 38% But Its P/S Still Looks Reasonable

Auxly Cannabis Group Inc. (TSE:XLY) shareholders would be excited to see that the share price has had a great month, posting a 38% gain and recovering from prior weakness. The last 30 days were the cherry on top of the stock's 350% gain in the last year, which is nothing short of spectacular.

Since its price has surged higher, when almost half of the companies in Canada's Pharmaceuticals industry have price-to-sales ratios (or "P/S") below 1.1x, you may consider Auxly Cannabis Group as a stock probably not worth researching with its 1.7x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

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View our latest analysis for Auxly Cannabis Group

How Auxly Cannabis Group Has Been Performing

Auxly Cannabis Group has been doing a good job lately as it's been growing revenue at a solid pace. It might be that many expect the respectable revenue performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Auxly Cannabis Group will help you shine a light on its historical performance.

Do Revenue Forecasts Match The High P/S Ratio?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Auxly Cannabis Group's to be considered reasonable.

If we review the last year of revenue growth, the company posted a terrific increase of 27%. Pleasingly, revenue has also lifted 34% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been superb for the company.

When compared to the industry's one-year growth forecast of 7.9%, the most recent medium-term revenue trajectory is noticeably more alluring

In light of this, it's understandable that Auxly Cannabis Group's P/S sits above the majority of other companies. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the wider industry.

The Key Takeaway

Auxly Cannabis Group shares have taken a big step in a northerly direction, but its P/S is elevated as a result. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Auxly Cannabis Group revealed its three-year revenue trends are contributing to its high P/S, given they look better than current industry expectations. At this stage investors feel the potential continued revenue growth in the future is great enough to warrant an inflated P/S. Barring any significant changes to the company's ability to make money, the share price should continue to be propped up.

A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for Auxly Cannabis Group with six simple checks will allow you to discover any risks that could be an issue.

If these risks are making you reconsider your opinion on Auxly Cannabis Group, 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.