There wouldn't be many who think ADT Inc.'s (NYSE:ADT) price-to-sales (or "P/S") ratio of 1.2x is worth a mention when the median P/S for the Consumer Services industry in the United States is similar at about 1.3x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

What Does ADT's Recent Performance Look Like?

With revenue growth that's inferior to most other companies of late, ADT has been relatively sluggish. One possibility is that the P/S ratio is moderate because investors think this lacklustre revenue performance will turn around. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

How Is ADT's Revenue Growth Trending?

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

Retrospectively, the last year delivered a decent 3.4% gain to the company's revenues. Still, lamentably revenue has fallen 2.8% in aggregate from three years ago, which is disappointing. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Looking ahead now, revenue is anticipated to slump, contracting by 2.0% during the coming year according to the four analysts following the company. Meanwhile, the broader industry is forecast to expand by 14%, which paints a poor picture.

With this information, we find it concerning that ADT is trading at a fairly similar P/S compared to the industry. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock right now. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the negative growth outlook.

The Key Takeaway

Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our check of ADT's analyst forecasts revealed that its outlook for shrinking revenue isn't bringing down its P/S as much as we would have predicted. When we see a gloomy outlook like this, our immediate thoughts are that the share price is at risk of declining, negatively impacting P/S. If the declining revenues were to materialize in the form of a declining share price, shareholders will be feeling the pinch.

There are also other vital risk factors to consider and we've discovered 4 warning signs for ADT (1 doesn't sit too well with us!) that you should be aware of before investing here.

If these risks are making you reconsider your opinion on ADT, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.