With A 32% Price Drop For Freshpet, Inc. (NASDAQ:FRPT) You'll Still Get What You Pay For

Freshpet, Inc. (NASDAQ:FRPT) shareholders that were waiting for something to happen have been dealt a blow with a 32% share price drop in the last month. Longer-term, the stock has been solid despite a difficult 30 days, gaining 18% in the last year.

In spite of the heavy fall in price, when almost half of the companies in the United States' Food industry have price-to-sales ratios (or "P/S") below 0.8x, you may still consider Freshpet as a stock not worth researching with its 5.3x 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.

Check out our latest analysis for Freshpet

How Freshpet Has Been Performing

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.

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.

Taking a look back first, we see that the company grew revenue by an impressive 27% last year. The latest three year period has also seen an excellent 129% overall rise in revenue, aided by its short-term performance. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 23% each year during the coming three years according to the analysts following the company. That's shaping up to be materially higher than the 2.6% per annum growth forecast for the broader industry.

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.

What Does Freshpet's P/S Mean For Investors?

Even after such a strong price drop, Freshpet's P/S still exceeds the industry median significantly. 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.

As we suspected, our examination of Freshpet's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 1 warning sign for Freshpet you should be aware of.

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.