Why Investors Shouldn't Be Surprised By Tikun Olam-Cannbit Pharmaceuticals Ltd's (TLV:TKUN) Low P/S

Tikun Olam-Cannbit Pharmaceuticals Ltd's (TLV:TKUN) price-to-sales (or "P/S") ratio of 0.8x might make it look like a buy right now compared to the Pharmaceuticals industry in Israel, where around half of the companies have P/S ratios above 2.8x and even P/S above 6x are quite common. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

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View our latest analysis for Tikun Olam-Cannbit Pharmaceuticals

How Tikun Olam-Cannbit Pharmaceuticals Has Been Performing

For instance, Tikun Olam-Cannbit Pharmaceuticals' receding revenue in recent times would have to be some food for thought. One possibility is that the P/S is low because investors think the company won't do enough to avoid underperforming the broader industry in the near future. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

Although there are no analyst estimates available for Tikun Olam-Cannbit Pharmaceuticals, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Do Revenue Forecasts Match The Low P/S Ratio?

The only time you'd be truly comfortable seeing a P/S as low as Tikun Olam-Cannbit Pharmaceuticals' is when the company's growth is on track to lag the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 21%. As a result, revenue from three years ago have also fallen 5.6% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 224% shows it's an unpleasant look.

With this in mind, we understand why Tikun Olam-Cannbit Pharmaceuticals' P/S is lower than most of its industry peers. However, we think shrinking revenues are unlikely to lead to a stable P/S over the longer term, which could set up shareholders for future disappointment. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

What Does Tikun Olam-Cannbit Pharmaceuticals' P/S Mean For Investors?

We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

It's no surprise that Tikun Olam-Cannbit Pharmaceuticals maintains its low P/S off the back of its sliding revenue over the medium-term. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Plus, you should also learn about these 5 warning signs we've spotted with Tikun Olam-Cannbit Pharmaceuticals.

If these risks are making you reconsider your opinion on Tikun Olam-Cannbit Pharmaceuticals, 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.