Vital Farms, Inc.'s (NASDAQ:VITL) price-to-sales (or "P/S") ratio of 1.7x may not look like an appealing 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 as high as it is.  

NasdaqGM:VITL Price to Sales Ratio vs Industry February 22nd 2024

How Vital Farms Has Been Performing

Recent times have been advantageous for Vital Farms as its revenues have been rising faster than most other companies.   It seems the market expects this form will continue into the future, hence the elevated P/S ratio.  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 Vital Farms will help you uncover what's on the horizon.  

How Is Vital Farms' Revenue Growth Trending?  

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

If we review the last year of revenue growth, the company posted a terrific increase of 36%.   Pleasingly, revenue has also lifted 121% in aggregate from three years ago, thanks to the last 12 months of growth.  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 seven analysts covering the company suggest revenue should grow by 14% per annum over the next three years.  Meanwhile, the rest of the industry is forecast to only expand by 2.8% per annum, which is noticeably less attractive.

With this in mind, it's not hard to understand why Vital Farms' P/S is high relative to its industry peers.  It seems most investors are expecting this strong future growth and are willing to pay more for the stock.  

The Key Takeaway

Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of Vital Farms' 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.    

We don't want to rain on the parade too much, but we did also find 1 warning sign for Vital Farms that you need to be mindful of.  

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.