Why Investors Shouldn't Be Surprised By Temple & Webster Group Ltd's (ASX:TPW) 27% Share Price Surge

Temple & Webster Group Ltd (ASX:TPW) shareholders would be excited to see that the share price has had a great month, posting a 27% gain and recovering from prior weakness. The last 30 days bring the annual gain to a very sharp 86%.

After such a large jump in price, you could be forgiven for thinking Temple & Webster Group is a stock not worth researching with a price-to-sales ratios (or "P/S") of 2.8x, considering almost half the companies in Australia's Specialty Retail industry have P/S ratios below 0.8x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

See our latest analysis for Temple & Webster Group

What Does Temple & Webster Group's P/S Mean For Shareholders?

Recent times have been advantageous for Temple & Webster Group as its revenues have been rising faster than most other companies. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. However, if this isn't the case, investors might get caught out paying too much for the stock.

Keen to find out how analysts think Temple & Webster Group's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Enough Revenue Growth Forecasted For Temple & Webster Group?

In order to justify its P/S ratio, Temple & Webster Group would need to produce impressive growth in excess of the industry.

Retrospectively, the last year delivered an exceptional 26% gain to the company's top line. Pleasingly, revenue has also lifted 53% 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.

Looking ahead now, revenue is anticipated to climb by 22% each year during the coming three years according to the eleven analysts following the company. Meanwhile, the rest of the industry is forecast to only expand by 8.1% per year, which is noticeably less attractive.

With this in mind, it's not hard to understand why Temple & Webster Group's 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.

What Does Temple & Webster Group's P/S Mean For Investors?

Temple & Webster Group's P/S is on the rise since its shares have risen strongly. 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.

Our look into Temple & Webster Group shows that its P/S ratio remains high on the merit of its strong future revenues. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. It's hard to see the share price falling strongly in the near future under these circumstances.

Plus, you should also learn about this 1 warning sign we've spotted with Temple & Webster Group.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.