When you see that almost half of the companies in the Commercial Services industry in the United States have price-to-sales ratios (or "P/S") below 1.4x, Montrose Environmental Group, Inc. (NYSE:MEG) looks to be giving off some sell signals with its 2.5x P/S ratio. 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 Montrose Environmental Group Has Been Performing

Recent times have been advantageous for Montrose Environmental Group as its revenues have been rising faster than most other companies. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

How Is Montrose Environmental Group's Revenue Growth Trending?

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

Taking a look back first, we see that the company grew revenue by an impressive 20% last year. The strong recent performance means it was also able to grow revenue by 62% in total over the last three years. 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 12% per year during the coming three years according to the seven analysts following the company. That's shaping up to be materially lower than the 21% each year growth forecast for the broader industry.

In light of this, it's alarming that Montrose Environmental Group's P/S sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

What We Can Learn From Montrose Environmental Group's P/S?

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.

Despite analysts forecasting some poorer-than-industry revenue growth figures for Montrose Environmental Group, this doesn't appear to be impacting the P/S in the slightest. Right now we aren't comfortable with the high P/S as the predicted future revenues aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Montrose Environmental Group that 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.