There wouldn't be many who think Dollar Tree, Inc.'s (NASDAQ:DLTR) price-to-sales (or "P/S") ratio of 0.5x is worth a mention when the median P/S for the Consumer Retailing industry in the United States is similar at about 0.4x. 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.

How Dollar Tree Has Been Performing

There hasn't been much to differentiate Dollar Tree's and the industry's revenue growth lately. It seems that many are expecting the mediocre revenue performance to persist, which has held the P/S ratio back. Those who are bullish on Dollar Tree will be hoping that revenue performance can pick up, so that they can pick up the stock at a slightly lower valuation.

Do Revenue Forecasts Match The P/S Ratio?

In order to justify its P/S ratio, Dollar Tree would need to produce growth that's similar to the industry.

If we review the last year of revenue growth, the company posted a worthy increase of 5.0%. The latest three year period has also seen a 20% overall rise in revenue, aided somewhat by its short-term performance. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

Turning to the outlook, the next three years should generate growth of 3.0% each year as estimated by the analysts watching the company. With the industry predicted to deliver 4.3% growth per year, the company is positioned for a comparable revenue result.

With this in mind, it makes sense that Dollar Tree's P/S is closely matching its industry peers. It seems most investors are expecting to see average future growth and are only willing to pay a moderate amount for the stock.

What Does Dollar Tree's P/S Mean For Investors?

Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

We've seen that Dollar Tree maintains an adequate P/S seeing as its revenue growth figures match the rest of the industry. At this stage investors feel the potential for an improvement or deterioration in revenue isn't great enough to push P/S in a higher or lower direction. If all things remain constant, the possibility of a drastic share price movement remains fairly remote.

Many other vital risk factors can be found on the company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Dollar Tree with six simple checks.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.