The Honest Company, Inc. (NASDAQ:HNST) shareholders would be excited to see that the share price has had a great month, posting a 34% gain and recovering from prior weakness. The last month tops off a massive increase of 220% in the last year.

In spite of the firm bounce in price, there still wouldn't be many who think Honest Company's price-to-sales (or "P/S") ratio of 1.4x is worth a mention when the median P/S in the United States' Personal Products industry is similar at about 1.1x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

How Has Honest Company Performed Recently?

Honest Company's revenue growth of late has been pretty similar to most other companies. Perhaps the market is expecting future revenue performance to show no drastic signs of changing, justifying the P/S being at current levels. If you like the company, you'd be hoping this can at least be maintained so that you could pick up some stock while it's not quite in favour.

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

Do Revenue Forecasts Match The P/S Ratio?

The only time you'd be comfortable seeing a P/S like Honest Company's is when the company's growth is tracking the industry closely.

Retrospectively, the last year delivered a decent 6.4% gain to the company's revenues. The solid recent performance means it was also able to grow revenue by 14% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

Looking ahead now, revenue is anticipated to climb by 5.8% each year during the coming three years according to the eight analysts following the company. With the industry predicted to deliver 4.0% growth per year, the company is positioned for a comparable revenue result.

With this in mind, it makes sense that Honest Company's P/S is closely matching its industry peers. It seems most investors are expecting to see average future growth and are only willing to pay a moderate amount for the stock.

The Final Word

Honest Company appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

A Honest Company's P/S seems about right to us given the knowledge that analysts are forecasting a revenue outlook that is similar to the Personal Products industry. Right now shareholders are comfortable with the P/S as they are quite confident future revenue won't throw up any surprises. Unless these conditions change, they will continue to support the share price at these levels.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Honest Company that you should be aware of.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.