Scholar Education Group (HKG:1769) shareholders would be excited to see that the share price has had a great month, posting a 86% gain and recovering from prior weakness. Looking back a bit further, it's encouraging to see the stock is up 86% in the last year.

Following the firm bounce in price, you could be forgiven for thinking Scholar Education Group is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 5.1x, considering almost half the companies in Hong Kong's Consumer Services industry have P/S ratios below 1.4x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

What Does Scholar Education Group's Recent Performance Look Like?

Scholar Education Group could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. Perhaps the market is expecting the poor revenue to reverse, justifying it's current high P/S.. If not, then existing shareholders may be extremely nervous about the viability of the share price.

Is There Enough Revenue Growth Forecasted For Scholar Education Group?

The only time you'd be truly comfortable seeing a P/S as steep as Scholar Education Group's is when the company's growth is on track to outshine the industry decidedly.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 8.7%. The last three years don't look nice either as the company has shrunk revenue by 38% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Turning to the outlook, the next year should generate growth of 75% as estimated by the only analyst watching the company. That's shaping up to be materially higher than the 19% growth forecast for the broader industry.

With this information, we can see why Scholar Education Group is trading at such a high P/S compared to the industry. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

Scholar Education Group's P/S has grown nicely over the last month thanks to a handy boost in the share price. 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 Scholar Education Group'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.

There are also other vital risk factors to consider before investing and we've discovered 3 warning signs for Scholar Education Group that you should be aware of.

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.