Cogent Communications Holdings, Inc. (NASDAQ:CCOI) shareholders that were waiting for something to happen have been dealt a blow with a 29% share price drop in the last month. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 22% share price drop.

Even after such a large drop in price, when almost half of the companies in the United States' Telecom industry have price-to-sales ratios (or "P/S") below 1.4x, you may still consider Cogent Communications Holdings as a stock probably not worth researching with its 2.5x 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 as high as it is.

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See our latest analysis for Cogent Communications Holdings

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

Recent times have been advantageous for Cogent Communications Holdings as its revenues have been rising faster than most other companies. The P/S is probably high because investors think this strong revenue performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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What Are Revenue Growth Metrics Telling Us About The High P/S?

In order to justify its P/S ratio, Cogent Communications Holdings would need to produce impressive growth in excess of the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 7.3% last year. Pleasingly, revenue has also lifted 67% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenues over that time.

Turning to the outlook, the next three years should generate growth of 8.0% per year as estimated by the twelve analysts watching the company. With the industry predicted to deliver 98% growth per year, the company is positioned for a weaker revenue result.

In light of this, it's alarming that Cogent Communications Holdings' P/S sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. 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?

Cogent Communications Holdings' P/S remain high even after its stock plunged. 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.

Despite analysts forecasting some poorer-than-industry revenue growth figures for Cogent Communications Holdings, this doesn't appear to be impacting the P/S in the slightest. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. At these price levels, investors should remain cautious, particularly if things don't improve.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Cogent Communications Holdings (at least 2 which make us uncomfortable), and understanding these should be part of your investment process.

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