The Honest Company, Inc. (NASDAQ:HNST) Soars 28% But It's A Story Of Risk Vs Reward

Despite an already strong run, The Honest Company, Inc. (NASDAQ:HNST) shares have been powering on, with a gain of 28% in the last thirty days. The annual gain comes to 149% following the latest surge, making investors sit up and take notice.

Even after such a large jump in price, Honest Company may still be sending buy signals at present with its price-to-sales (or "P/S") ratio of 1.2x, considering almost half of all companies in the Personal Products industry in the United States have P/S ratios greater than 1.7x and even P/S higher than 4x aren't out of the ordinary. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Honest Company

What Does Honest Company's P/S Mean For Shareholders?

With revenue growth that's inferior to most other companies of late, Honest Company has been relatively sluggish. It seems that many are expecting the uninspiring revenue performance to persist, which has repressed the growth of the P/S ratio. If you still like the company, you'd be hoping revenue doesn't get any worse and that you could pick up some stock while it's out of favour.

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

What Are Revenue Growth Metrics Telling Us About The Low P/S?

In order to justify its P/S ratio, Honest Company would need to produce sluggish growth that's trailing the industry.

If we review the last year of revenue growth, the company posted a worthy increase of 9.8%. The solid recent performance means it was also able to grow revenue by 15% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

Turning to the outlook, the next three years should generate growth of 4.6% each year as estimated by the five analysts watching the company. That's shaping up to be similar to the 6.2% per year growth forecast for the broader industry.

With this in consideration, we find it intriguing that Honest Company's P/S is lagging behind its industry peers. Apparently some shareholders are doubtful of the forecasts and have been accepting lower selling prices.

The Bottom Line On Honest Company's P/S

Honest Company's stock price has surged recently, but its but its P/S still remains modest. 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.

Our examination of Honest Company's revealed that its P/S remains low despite analyst forecasts of revenue growth matching the wider industry. When we see middle-of-the-road revenue growth like this, we assume it must be the potential risks that are what is placing pressure on the P/S ratio. However, if you agree with the analysts' forecasts, you may be able to pick up the stock at an attractive price.

Before you take the next step, you should know about the 4 warning signs for Honest Company that we have uncovered.

If you're unsure about the strength of Honest Company'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.