Lumentum Holdings Inc. (NASDAQ:LITE) shareholders would be excited to see that the share price has had a great month, posting a 32% gain and recovering from prior weakness. The last 30 days bring the annual gain to a very sharp 67%.

Since its price has surged higher, you could be forgiven for thinking Lumentum Holdings is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 3.5x, considering almost half the companies in the United States' Communications industry have P/S ratios below 1.1x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

What Does Lumentum Holdings' Recent Performance Look Like?

Lumentum Holdings 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.. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Is There Enough Revenue Growth Forecasted For Lumentum Holdings?

Lumentum Holdings' 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 23%. As a result, revenue from three years ago have also fallen 22% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Turning to the outlook, the next three years should generate growth of 17% each year as estimated by the analysts watching the company. That's shaping up to be materially higher than the 9.5% per annum growth forecast for the broader industry.

With this information, we can see why Lumentum Holdings 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 Does Lumentum Holdings' P/S Mean For Investors?

The strong share price surge has lead to Lumentum Holdings' P/S soaring as well. 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.

As we suspected, our examination of Lumentum Holdings' 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. It's hard to see the share price falling strongly in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Lumentum Holdings (of which 1 shouldn't be ignored!) you should know about.

If these risks are making you reconsider your opinion on Lumentum Holdings, 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.