When you see that almost half of the companies in the Tech industry in the United States have price-to-sales ratios (or "P/S") below 1.6x, Pure Storage, Inc. (NYSE:PSTG) looks to be giving off strong sell signals with its 5.4x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

How Pure Storage Has Been Performing

With revenue growth that's superior to most other companies of late, Pure Storage has been doing relatively well. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. If not, then existing shareholders might be a little nervous about the viability of the share price.

Is There Enough Revenue Growth Forecasted For Pure Storage?

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

Taking a look back first, we see that the company managed to grow revenues by a handy 8.9% last year. Pleasingly, revenue has also lifted 65% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 13% per annum during the coming three years according to the analysts following the company. With the industry only predicted to deliver 9.8% per annum, the company is positioned for a stronger revenue result.

In light of this, it's understandable that Pure Storage'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 Pure Storage'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 Pure Storage maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Tech industry, as expected. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

You always need to take note of risks, for example - Pure Storage has 2 warning signs we think you should be aware of.

If you're unsure about the strength of Pure Storage'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.