Telephone and Data Systems, Inc. (NYSE:TDS) shareholders would be excited to see that the share price has had a great month, posting a 28% gain and recovering from prior weakness. The last month tops off a massive increase of 172% in the last year.

Even after such a large jump in price, it's still not a stretch to say that Telephone and Data Systems' price-to-sales (or "P/S") ratio of 0.4x right now seems quite "middle-of-the-road" compared to the Wireless Telecom industry in the United States, where the median P/S ratio is around 0.7x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

How Has Telephone and Data Systems Performed Recently?

Recent times haven't been great for Telephone and Data Systems as its revenue has been falling quicker than most other companies. Perhaps the market is expecting future revenue performance to begin matching the rest of the industry, which has kept the P/S from declining. So while you could say the stock is cheap, investors will be looking for improvement before they see it as good value. Or at the very least, you'd be hoping it doesn't keep underperforming if your plan is to pick up some stock while it's not in favour.

Is There Some Revenue Growth Forecasted For Telephone and Data Systems?

In order to justify its P/S ratio, Telephone and Data Systems would need to produce growth that's similar to the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 5.2%. As a result, revenue from three years ago have also fallen 3.1% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Looking ahead now, revenue is anticipated to slump, contracting by 0.8% during the coming year according to the four analysts following the company. That's not great when the rest of the industry is expected to grow by 2.9%.

In light of this, it's somewhat alarming that Telephone and Data Systems' P/S sits in line with the majority of other companies. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock right now. Only the boldest would assume these prices are sustainable as these declining revenues are likely to weigh on the share price eventually.

The Final Word

Telephone and Data Systems' stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

While Telephone and Data Systems' P/S isn't anything out of the ordinary for companies in the industry, we didn't expect it given forecasts of revenue decline. When we see a gloomy outlook like this, our immediate thoughts are that the share price is at risk of declining, negatively impacting P/S. If the poor revenue outlook tells us one thing, it's that these current price levels could be unsustainable.

Before you take the next step, you should know about the 3 warning signs for Telephone and Data Systems (2 are a bit unpleasant!) that we have uncovered.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.