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

Freshpet, Inc.'s (NASDAQ:FRPT) price-to-sales (or "P/S") ratio of 7.5x may look like a poor investment opportunity when you consider close to half the companies in the Food industry in the United States have P/S ratios below 0.9x. 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.

View our latest analysis for Freshpet

How Has Freshpet Performed Recently?

With revenue growth that's superior to most other companies of late, Freshpet has been doing relatively well. 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.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Freshpet.

How Is Freshpet's Revenue Growth Trending?

Freshpet's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 29%. The latest three year period has also seen an excellent 135% overall rise in revenue, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing revenue over that time.

Shifting to the future, estimates from the analysts covering the company suggest revenue should grow by 23% each year over the next three years. Meanwhile, the rest of the industry is forecast to only expand by 2.8% per year, which is noticeably less attractive.

With this information, we can see why Freshpet is trading at such a high P/S compared to the industry. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

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.

Our look into Freshpet shows that its P/S ratio remains high on the merit of its strong future revenues. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

Having said that, be aware Freshpet is showing 1 warning sign in our investment analysis, you should know about.

If these risks are making you reconsider your opinion on Freshpet, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.