Valuations are a touchy subject in the cannabis industry. That's because many pot stocks are wildly overvalued, and investors are still struggling to determine what they're worth today. One stock that could enter the discussion as one of the cheaper options is Cronos Group (CRON 2.90%). A stock that's trading at less than seven times its earnings and 1.4 times its book value would seem to tick many of the boxes Warren Buffett-type investors look for. That's where Cronos finds itself today but is the stock really an excellent value?

Profitable for three straight quarters

While many cannabis companies have struggled to turn a profit even once, Cronos has done so in three successive quarters. Over the past nine months, the company's net income totaled a cumulative 1.5 billion Canadian dollars. It's an incredible streak, but it warrants an asterisk next to it.

During those three quarters combined, Cronos incurred an operating loss of CA$75 million on net revenue of just CA$29 million. The company was able to stay out of the red thanks to its other income and expenses. Specifically, Cronos benefited from gains on the revaluation of its derivative liabilities to the tune of more than CA$1.5 billion. That line item has grossly inflated the company's profitability and allowed it to showcase a very attractive price-to-earnings ratio in the process.

Cannabis plant.

Image Source: Getty Images.

It's a prime example of how misleading financial statements can be. The derivative liabilities relate to cigarette maker Altria's investment in the company. Cronos has classified Altria's warrants and pre-emptive rights as derivative liabilities. And since Cronos' share price has been falling for much of 2019, the value of those liabilities has been dropping as well, resulting in fair value gains for the company.

Very expensive when looking at sales

Gains and other income can easily distort a company's earnings and its price-to-earnings ratio. However, it's a lot more difficult for the price-to-sales ratio to mislead, since it reflects the sales a company has earned during a period. Cronos' top line has unfortunately not been a strong point; revenue was above CA$10 million in only two of its past four quarters.

That's a trivial amount given the stock's market cap of $2.5 billion. By comparison, Aurora Cannabis (ACB 2.63%) has a lower market cap of $2.1 billion, and the lowest its sales have reached in any of the past four quarters was CA$54 million; over the trailing 12 months, Aurora's sales topped nearly CA$300 million. Its price-to-sales multiple of 9.5 pales in comparison to that of Cronos, which trades at nearly 90 times its revenue.

Cronos has fallen around 40% in 2019, right in line with how the Horizons Marijuana Life Sciences ETF performed during that time. Remarkably, even though it generated much more in revenue, Aurora's stock price declined by more than 63%.

If not Cronos, then what?

By now it's clear that Cronos isn't the great value buy that it appears to be at first glance. While the temptation may be to say that Aphria is a better value buy, as it has also been profitable for consecutive periods, nonoperating items have been inflating its bottom line as well. However, its price-to-sales multiple of 4.6 looks like a bargain compared to both Aurora and Cronos. It could be one of the better buys in the industry today, but even Aphria is still a bit of a risky investment, at least until it can prove that it can stay in the black without needing assistance from items below its operating income.

It's still a delicate time in the industry, and investors might be well advised to wait a while before investing in cannabis companies, at least until they prove that they're able to produce consistent and sustainable profits.