Revenues Tell The Story For TAL Education Group (NYSE:TAL) As Its Stock Soars 51%

TAL Education Group (NYSE:TAL) shareholders would be excited to see that the share price has had a great month, posting a 51% gain and recovering from prior weakness. The last 30 days bring the annual gain to a very sharp 39%.

After such a large jump in price, given around half the companies in the United States' Consumer Services industry have price-to-sales ratios (or "P/S") below 1.4x, you may consider TAL Education Group as a stock to avoid entirely with its 4.5x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

See our latest analysis for TAL Education Group

How TAL Education Group Has Been Performing

TAL Education Group certainly has been doing a good job lately as it's been growing revenue more than most other companies. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

How Is TAL Education Group's Revenue Growth Trending?

In order to justify its P/S ratio, TAL Education Group would need to produce outstanding growth that's well in excess of the industry.

Taking a look back first, we see that the company grew revenue by an impressive 52% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year revenue frustratingly shrank by 67% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 28% per annum during the coming three years according to the analysts following the company. With the industry only predicted to deliver 19% each year, the company is positioned for a stronger revenue result.

With this information, we can see why TAL Education Group 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.

What We Can Learn From TAL Education Group's P/S?

The strong share price surge has lead to TAL Education Group's P/S soaring as well. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that TAL Education Group maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Consumer Services industry, as expected. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless these conditions change, they will continue to provide strong support to the share price.

Having said that, be aware TAL Education Group is showing 2 warning signs in our investment analysis, you should know about.

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).

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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.