Zegona Communications plc's (LON:ZEG) P/S Is Still On The Mark Following 26% Share Price Bounce

The Zegona Communications plc (LON:ZEG) share price has done very well over the last month, posting an excellent gain of 26%. The last month tops off a massive increase of 143% in the last year.

Following the firm bounce in price, you could be forgiven for thinking Zegona Communications is a stock not worth researching with a price-to-sales ratios (or "P/S") of 3.2x, considering almost half the companies in the United Kingdom's Telecom industry have P/S ratios below 1.7x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

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What Does Zegona Communications' P/S Mean For Shareholders?

Zegona Communications certainly has been doing a good job lately as it's been growing revenue more than most other companies. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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How Is Zegona Communications' Revenue Growth Trending?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Zegona Communications' to be considered reasonable.

If we review the last year of revenue growth, we see the company's revenues grew exponentially. Although, its longer-term performance hasn't been anywhere near as strong with three-year revenue growth being relatively non-existent overall. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Shifting to the future, estimates from the six analysts covering the company suggest revenue should grow by 15% each year over the next three years. With the industry only predicted to deliver 2.5% each year, the company is positioned for a stronger revenue result.

In light of this, it's understandable that Zegona Communications' P/S sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

Zegona Communications' P/S is on the rise since its shares have risen strongly. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our look into Zegona Communications shows that its P/S ratio remains high on the merit of its strong future revenues. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. It's hard to see the share price falling strongly in the near future under these circumstances.

Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for Zegona Communications with six simple checks on some of these key factors.

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