With 22nd Century Group, Inc. (NASDAQ:XXII) It Looks Like You'll Get What You Pay For

When close to half the companies in the Tobacco industry in the United States have price-to-sales ratios (or "P/S") below 1x, you may consider 22nd Century Group, Inc. (NASDAQ:XXII) as a stock to potentially avoid with its 1.6x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for 22nd Century Group

What Does 22nd Century Group's P/S Mean For Shareholders?

With its revenue growth in positive territory compared to the declining revenue of most other companies, 22nd Century Group has been doing quite well of late. Perhaps the market is expecting the company's future revenue growth to buck the trend of the industry, contributing to a higher P/S. However, if this isn't the case, investors might get caught out paying too much for the stock.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on 22nd Century Group.

Is There Enough Revenue Growth Forecasted For 22nd Century Group?

There's an inherent assumption that a company should outperform the industry for P/S ratios like 22nd Century Group's to be considered reasonable.

If we review the last year of revenue growth, the company posted a terrific increase of 126%. The latest three year period has also seen an excellent 182% overall rise in revenue, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing revenue over that time.

Turning to the outlook, the next year should generate growth of 71% as estimated by the four analysts watching the company. Meanwhile, the rest of the industry is forecast to only expand by 4.6%, which is noticeably less attractive.

In light of this, it's understandable that 22nd Century Group'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 22nd Century Group's 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.

We've established that 22nd Century Group maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Tobacco industry, as expected. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

We don't want to rain on the parade too much, but we did also find 3 warning signs for 22nd Century Group (1 is a bit unpleasant!) that you need to be mindful of.

If you're unsure about the strength of 22nd Century Group's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.