When you see that almost half of the companies in the Specialty Retail industry in the United States have price-to-sales ratios (or "P/S") below 0.4x, RH (NYSE:RH) looks to be giving off some sell signals with its 2x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

How Has RH Performed Recently?

While the industry has experienced revenue growth lately, RH's revenue has gone into reverse gear, which is not great. Perhaps the market is expecting the poor revenue to reverse, justifying it's current high P/S.. However, if this isn't the case, investors might get caught out paying too much for the stock.

How Is RH's Revenue Growth Trending?

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

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 4.1%. As a result, revenue from three years ago have also fallen 13% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Turning to the outlook, the next three years should generate growth of 9.7% per annum as estimated by the analysts watching the company. Meanwhile, the rest of the industry is forecast to only expand by 5.9% per annum, which is noticeably less attractive.

In light of this, it's understandable that RH's P/S sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What Does RH's P/S Mean For Investors?

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.

As we suspected, our examination of RH's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

Plus, you should also learn about these 5 warning signs we've spotted with RH (including 2 which shouldn't be ignored).

If you're unsure about the strength of RH'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.