The Jumia Technologies AG (NYSE:JMIA) share price has done very well over the last month, posting an excellent gain of 36%. The annual gain comes to 126% following the latest surge, making investors sit up and take notice.

Since its price has surged higher, you could be forgiven for thinking Jumia Technologies is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 3.2x, considering almost half the companies in the United States' Multiline Retail industry have P/S ratios below 0.9x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

What Does Jumia Technologies' P/S Mean For Shareholders?

Jumia Technologies could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. It might be that many expect the dour revenue performance to recover substantially, which has kept the P/S from collapsing. However, if this isn't the case, investors might get caught out paying too much for the stock.

Is There Enough Revenue Growth Forecasted For Jumia Technologies?

Jumia Technologies' 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.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 1.5%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 20% overall rise in revenue. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of revenue growth.

Turning to the outlook, the next year should generate growth of 3.8% as estimated by the dual analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 15%, which is noticeably more attractive.

In light of this, it's alarming that Jumia Technologies' P/S sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Final Word

Jumia Technologies' P/S has grown nicely over the last month thanks to a handy boost in the share price. 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 concluded that Jumia Technologies currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. Right now we aren't comfortable with the high P/S as the predicted future revenues aren't likely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

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

If these risks are making you reconsider your opinion on Jumia Technologies, 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.