Canaan Inc.'s (NASDAQ:CAN) Shares Leap 40% Yet They're Still Not Telling The Full Story

Canaan Inc. (NASDAQ:CAN) shares have continued their recent momentum with a 40% gain in the last month alone. Longer-term shareholders would be thankful for the recovery in the share price since it's now virtually flat for the year after the recent bounce.

Although its price has surged higher, it's still not a stretch to say that Canaan's price-to-sales (or "P/S") ratio of 1.4x right now seems quite "middle-of-the-road" compared to the Tech industry in the United States, where the median P/S ratio is around 1.8x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

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Check out our latest analysis for Canaan

What Does Canaan's P/S Mean For Shareholders?

Recent times have been advantageous for Canaan as its revenues have been rising faster than most other companies. It might be that many expect the strong revenue performance to wane, which has kept the P/S ratio from rising. If the company manages to stay the course, then investors should be rewarded with a share price that matches its revenue figures.

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

What Are Revenue Growth Metrics Telling Us About The P/S?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Canaan's to be considered reasonable.

Taking a look back first, we see that the company grew revenue by an impressive 82% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year revenue frustratingly shrank by 64% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Looking ahead now, revenue is anticipated to climb by 67% during the coming year according to the five analysts following the company. That's shaping up to be materially higher than the 7.4% growth forecast for the broader industry.

In light of this, it's curious that Canaan's P/S sits in line with the majority of other companies. Apparently some shareholders are skeptical of the forecasts and have been accepting lower selling prices.

The Bottom Line On Canaan's P/S

Its shares have lifted substantially and now Canaan's P/S is back within range of the industry median. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

We've established that Canaan currently trades on a lower than expected P/S since its forecasted revenue growth is higher than the wider industry. When we see a strong revenue outlook, with growth outpacing the industry, we can only assume potential uncertainty around these figures are what might be placing slight pressure on the P/S ratio. This uncertainty seems to be reflected in the share price which, while stable, could be higher given the revenue forecasts.

Before you take the next step, you should know about the 4 warning signs for Canaan (3 can't be ignored!) that we have uncovered.

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.