Despite an already strong run, Sea Limited (NYSE:SE) shares have been powering on, with a gain of 27% in the last thirty days. The annual gain comes to 118% following the latest surge, making investors sit up and take notice.

Since its price has surged higher, you could be forgiven for thinking Sea is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 3.9x, considering almost half the companies in the United States' Entertainment industry have P/S ratios below 1.5x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

How Sea Has Been Performing

Recent times haven't been great for Sea as its revenue has been rising slower than most other companies. One possibility is that the P/S ratio is high because investors think this lacklustre revenue performance will improve markedly. However, if this isn't the case, investors might get caught out paying too much for the stock.

How Is Sea's Revenue Growth Trending?

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

Taking a look back first, we see that the company managed to grow revenues by a handy 14% last year. The latest three year period has also seen an excellent 112% overall rise in revenue, aided somewhat by its short-term performance. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 15% per annum during the coming three years according to the analysts following the company. That's shaping up to be materially higher than the 10% each year growth forecast for the broader industry.

In light of this, it's understandable that Sea's P/S sits above the majority of other companies. 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?

Shares in Sea have seen a strong upwards swing lately, which has really helped boost its P/S figure. 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.

We've established that Sea maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Entertainment industry, as expected. 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.

The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for Sea with six simple checks will allow you to discover any risks that could be an issue.

If you're unsure about the strength of Sea's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.