When close to half the companies in the Hospitality industry in the United States have price-to-sales ratios (or "P/S") below 1.5x, you may consider Dutch Bros Inc. (NYSE:BROS) as a stock to avoid entirely with its 3.6x 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 so lofty.

How Dutch Bros Has Been Performing

Recent times have been advantageous for Dutch Bros as its revenues have been rising faster than most other companies. The P/S is probably high because investors think this strong revenue performance will continue. However, if this isn't the case, investors might get caught out paying too much for the stock.

What Are Revenue Growth Metrics Telling Us About The High P/S?

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

Retrospectively, the last year delivered an exceptional 32% gain to the company's top line. The strong recent performance means it was also able to grow revenue by 177% 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 20% each year during the coming three years according to the twelve analysts following the company. Meanwhile, the rest of the industry is forecast to only expand by 12% per annum, which is noticeably less attractive.

With this in mind, it's not hard to understand why Dutch Bros' P/S is high relative to its industry peers. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What Does Dutch Bros' P/S Mean For Investors?

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 Dutch Bros 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. 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.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Dutch Bros you should know about.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.