Sweetgreen, Inc. (NYSE:SG) shares have retraced a considerable 26% in the last month, reversing a fair amount of their solid recent performance. Looking at the bigger picture, even after this poor month the stock is up 54% in the last year.

Even after such a large drop in price, given around half the companies in the United States' Hospitality industry have price-to-sales ratios (or "P/S") below 1.2x, you may still consider Sweetgreen as a stock to avoid entirely with its 4.4x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

How Sweetgreen Has Been Performing

Recent times haven't been great for Sweetgreen as its revenue has been rising slower than most other companies. Perhaps the market is expecting future revenue performance to undergo a reversal of fortunes, which has elevated the P/S ratio. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

How Is Sweetgreen's Revenue Growth Trending?

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

Taking a look back first, we see that the company grew revenue by an impressive 25% last year. Pleasingly, revenue has also lifted 169% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenue over that time.

Looking ahead now, revenue is anticipated to climb by 16% per annum during the coming three years according to the ten analysts following the company. With the industry only predicted to deliver 12% per annum, the company is positioned for a stronger revenue result.

With this information, we can see why Sweetgreen is trading at such a high P/S compared to the industry. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

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

Even after such a strong price drop, Sweetgreen's P/S still exceeds the industry median significantly. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Sweetgreen maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Hospitality industry, as expected. 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.

You should always think about risks. Case in point, we've spotted 3 warning signs for Sweetgreen you should be aware of.

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.

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