Why We're Not Concerned About Dollar Tree, Inc.'s (NASDAQ:DLTR) Share Price

It's not a stretch to say that Dollar Tree, Inc.'s (NASDAQ:DLTR) price-to-sales (or "P/S") ratio of 0.7x right now seems quite "middle-of-the-road" for companies in the Consumer Retailing industry in the United States, where the median P/S ratio is around 0.4x. 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.

Check out our latest analysis for Dollar Tree

What Does Dollar Tree's P/S Mean For Shareholders?

Recent revenue growth for Dollar Tree has been in line with the industry. It seems that many are expecting the mediocre revenue performance to persist, which has held the P/S ratio back. If this is the case, then at least existing shareholders won't be losing sleep over the current share price.

Want the full picture on analyst estimates for the company? Then our free report on Dollar Tree will help you uncover what's on the horizon.

Is There Some Revenue Growth Forecasted For Dollar Tree?

In order to justify its P/S ratio, Dollar Tree would need to produce growth that's similar to the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 7.4% last year. Revenue has also lifted 20% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

Shifting to the future, estimates from the analysts covering the company suggest revenue should grow by 4.1% per annum over the next three years. That's shaping up to be similar to the 4.9% per annum growth forecast for the broader industry.

With this in mind, it makes sense that Dollar Tree's P/S is closely matching its industry peers. Apparently shareholders are comfortable to simply hold on while the company is keeping a low profile.

The Key Takeaway

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.

A Dollar Tree's P/S seems about right to us given the knowledge that analysts are forecasting a revenue outlook that is similar to the Consumer Retailing industry. Right now shareholders are comfortable with the P/S as they are quite confident future revenue won't throw up any surprises. Unless these conditions change, they will continue to support the share price at these levels.

A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for Dollar Tree with six simple checks will allow you to discover any risks that could be an issue.

If you're unsure about the strength of Dollar Tree's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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