When you see that almost half of the companies in the Telecom industry in the United States have price-to-sales ratios (or "P/S") below 1.3x, Cogent Communications Holdings, Inc. (NASDAQ:CCOI) looks to be giving off strong sell signals with its 4x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

What Does Cogent Communications Holdings' P/S Mean For Shareholders?

With its revenue growth in positive territory compared to the declining revenue of most other companies, Cogent Communications Holdings has been doing quite well of late. It seems that many are expecting the company to continue defying the broader industry adversity, which has increased investors' willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Cogent Communications Holdings.

Do Revenue Forecasts Match The High P/S Ratio?

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

Retrospectively, the last year delivered an exceptional 49% gain to the company's top line. The strong recent performance means it was also able to grow revenue by 77% in total over the last three years. 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 eleven analysts covering the company suggest revenue should grow by 6.9% per annum over the next three years. Meanwhile, the rest of the industry is forecast to expand by 205% per annum, which is noticeably more attractive.

In light of this, it's alarming that Cogent Communications Holdings' 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.

What Does Cogent Communications Holdings' P/S Mean For Investors?

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.

It comes as a surprise to see Cogent Communications Holdings trade at such a high P/S given the revenue forecasts look less than stellar. 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.

You need to take note of risks, for example - Cogent Communications Holdings has 6 warning signs (and 4 which shouldn't be ignored) we think you should know about.

If these risks are making you reconsider your opinion on Cogent Communications 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.