When you see that almost half of the companies in the Entertainment industry in the United States have price-to-sales ratios (or "P/S") below 1.2x, Sea Limited (NYSE:SE) looks to be giving off strong sell signals 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.

View our latest analysis for Sea

What Does Sea's Recent Performance Look Like?

Recent times have been advantageous for Sea as its revenues have been rising faster than most other companies. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. 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 Sea.

Is There Enough Revenue Growth Forecasted For Sea?

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

Retrospectively, the last year delivered an exceptional 29% gain to the company's top line. The latest three year period has also seen an excellent 69% overall rise in revenue, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing revenue over that time.

Shifting to the future, estimates from the analysts covering the company suggest revenue should grow by 20% per annum over the next three years. That's shaping up to be materially higher than the 12% per annum growth forecast for the broader industry.

With this information, we can see why Sea 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.

What Does Sea's P/S Mean For Investors?

Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Sea's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Sea that you need to be mindful of.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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