TAL Education Group (NYSE:TAL) shares have had a really impressive month, gaining 41% after a shaky period beforehand. The annual gain comes to 104% following the latest surge, making investors sit up and take notice.

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 1.3x, you may consider TAL Education Group as a stock to avoid entirely with its 7.3x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

What Does TAL Education Group's P/S Mean For Shareholders?

Recent times haven't been great for TAL Education Group as its revenue has been rising slower than most other companies. Perhaps the market is expecting future revenue performance to undergo a reversal of fortunes, which has elevated the P/S ratio. However, if this isn't the case, investors might get caught out paying too much for the stock.

What Are Revenue Growth Metrics Telling Us About The High P/S?

TAL Education Group's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

If we review the last year of revenue growth, the company posted a worthy increase of 2.9%. However, this wasn't enough as the latest three year period has seen an unpleasant 67% overall drop in revenue. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Turning to the outlook, the next three years should generate growth of 19% per annum as estimated by the analysts watching the company. With the industry only predicted to deliver 12% per year, the company is positioned for a stronger revenue result.

With this in mind, it's not hard to understand why TAL Education Group's P/S is high relative to its industry peers. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Bottom Line On TAL Education Group's P/S

The strong share price surge has lead to TAL Education Group's P/S soaring as well. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our look into TAL Education 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.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for TAL Education Group with six simple checks on some of these key factors.

If these risks are making you reconsider your opinion on TAL Education Group, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.