When close to half the companies in the Commercial Services industry in the United States have price-to-sales ratios (or "P/S") below 1.4x, you may consider MSA Safety Incorporated (NYSE:MSA) as a stock to avoid entirely with its 4x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

What Does MSA Safety's P/S Mean For Shareholders?

There hasn't been much to differentiate MSA Safety's and the industry's revenue growth lately. One possibility is that the P/S ratio is high because investors think this modest revenue performance will accelerate. However, if this isn't the case, investors might get caught out paying too much for the stock.

How Is MSA Safety's Revenue Growth Trending?

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

If we review the last year of revenue growth, the company posted a worthy increase of 13%. This was backed up an excellent period prior to see revenue up by 37% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenues over that time.

Turning to the outlook, the next year should generate growth of 4.6% as estimated by the two analysts watching the company. That's shaping up to be materially lower than the 8.1% growth forecast for the broader industry.

With this in consideration, we believe it doesn't make sense that MSA Safety's P/S is outpacing its industry peers. 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.

The Final Word

It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

It comes as a surprise to see MSA Safety trade at such a high P/S given the revenue forecasts look less than stellar. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Before you take the next step, you should know about the 2 warning signs for MSA Safety that we have uncovered.

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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