Decibel Cannabis Company Inc. (CVE:DB) Stock's 33% Dive Might Signal An Opportunity But It Requires Some Scrutiny

To the annoyance of some shareholders, Decibel Cannabis Company Inc. (CVE:DB) shares are down a considerable 33% in the last month, which continues a horrid run for the company. For any long-term shareholders, the last month ends a year to forget by locking in a 72% share price decline.

Following the heavy fall in price, given about half the companies operating in Canada's Pharmaceuticals industry have price-to-sales ratios (or "P/S") above 1.2x, you may consider Decibel Cannabis as an attractive investment with its 0.1x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

View our latest analysis for Decibel Cannabis

How Has Decibel Cannabis Performed Recently?

Decibel Cannabis certainly has been doing a good job lately as it's been growing revenue more than most other companies. Perhaps the market is expecting future revenue performance to dive, which has kept the P/S suppressed. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

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

How Is Decibel Cannabis' Revenue Growth Trending?

In order to justify its P/S ratio, Decibel Cannabis would need to produce sluggish growth that's trailing the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 28%. The strong recent performance means it was also able to grow revenue by 198% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Shifting to the future, estimates from the four analysts covering the company suggest revenue should grow by 14% per year over the next three years. Meanwhile, the rest of the industry is forecast to only expand by 11% per annum, which is noticeably less attractive.

With this in consideration, we find it intriguing that Decibel Cannabis' P/S sits behind most of its industry peers. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

What We Can Learn From Decibel Cannabis' P/S?

Decibel Cannabis' P/S has taken a dip along with its share price. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

A look at Decibel Cannabis' revenues reveals that, despite glowing future growth forecasts, its P/S is much lower than we'd expect. When we see strong growth forecasts like this, we can only assume potential risks are what might be placing significant pressure on the P/S ratio. It appears the market could be anticipating revenue instability, because these conditions should normally provide a boost to the share price.

Having said that, be aware Decibel Cannabis is showing 2 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.