Warby Parker Inc.'s (NYSE:WRBY) price-to-sales (or "P/S") ratio of 2x may not look like an appealing investment opportunity when you consider close to half the companies in the Specialty Retail industry in the United States have P/S ratios below 0.4x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

View our latest analysis for Warby Parker

How Warby Parker Has Been Performing

With revenue growth that's superior to most other companies of late, Warby Parker 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.

Is There Enough Revenue Growth Forecasted For Warby Parker?

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

Retrospectively, the last year delivered a decent 12% gain to the company's revenues. The latest three year period has also seen an excellent 66% overall rise in revenue, aided somewhat 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 11% during the coming year according to the analysts following the company. Meanwhile, the rest of the industry is forecast to only expand by 6.1%, which is noticeably less attractive.

With this information, we can see why Warby Parker 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.

As we suspected, our examination of Warby Parker'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. Unless these conditions change, they will continue to provide strong support to the share price.

Many other vital risk factors can be found on the company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Warby Parker with six simple checks.

If you're unsure about the strength of Warby Parker'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.