Why Investors Shouldn't Be Surprised By Freshpet, Inc.'s (NASDAQ:FRPT) P/S

When you see that almost half of the companies in the Food industry in the United States have price-to-sales ratios (or "P/S") below 0.8x, Freshpet, Inc. (NASDAQ:FRPT) looks to be giving off strong sell signals with its 5.9x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Freshpet

How Has Freshpet Performed Recently?

Recent times have been advantageous for Freshpet 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.

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

Is There Enough Revenue Growth Forecasted For Freshpet?

The only time you'd be truly comfortable seeing a P/S as steep as Freshpet's is when the company's growth is on track to outshine the industry decidedly.

Retrospectively, the last year delivered an exceptional 32% gain to the company's top line. Pleasingly, revenue has also lifted 139% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Turning to the outlook, the next three years should generate growth of 24% each year as estimated by the analysts watching the company. With the industry only predicted to deliver 3.1% per year, the company is positioned for a stronger revenue result.

With this information, we can see why Freshpet is trading at such a high P/S compared to the industry. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

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 Freshpet maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Food industry, as expected. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for Freshpet with six simple checks on some of these key factors.

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.