Xcel Brands, Inc. (NASDAQ:XELB) shares have retraced a considerable 29% 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 31% in the last year.

In spite of the heavy fall in price, you could still be forgiven for thinking Xcel Brands is a stock not worth researching with a price-to-sales ratios (or "P/S") of 1x, considering almost half the companies in the United States' Specialty Retail industry have P/S ratios below 0.4x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

How Has Xcel Brands Performed Recently?

Xcel Brands hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. One possibility is that the P/S ratio is high because investors think this poor revenue performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

Do Revenue Forecasts Match The High P/S Ratio?

In order to justify its P/S ratio, Xcel Brands would need to produce impressive growth in excess of the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 34%. As a result, revenue from three years ago have also fallen 41% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Shifting to the future, estimates from the dual analysts covering the company suggest revenue growth is heading into negative territory, declining 13% over the next year. That's not great when the rest of the industry is expected to grow by 5.6%.

With this in mind, we find it intriguing that Xcel Brands' P/S is closely matching its industry peers. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock at any price. There's a very 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 Bottom Line On Xcel Brands' P/S

Despite the recent share price weakness, Xcel Brands' P/S remains higher than most other companies in the industry. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Our examination of Xcel Brands' analyst forecasts revealed that its shrinking revenue outlook isn't drawing down its high P/S anywhere near as much as we would have predicted. Right now we aren't comfortable with the high P/S as the predicted future revenue decline likely to impact the positive sentiment that's propping up the P/S. At these price levels, investors should remain cautious, particularly if things don't improve.

There are also other vital risk factors to consider before investing and we've discovered 4 warning signs for Xcel Brands that you should be aware of.

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.

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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.