Skip to main content

Why and How use the Price/Sales Ratio?

P/S Ratio = Market cap (shares outstanding * market price per share)/Total sales


Total sales can be found at the top of the income statement. Some companies will list total sales (also called revenues) on the first line, while others will list revenues from different business segments first and then add them to get total sales. Some companies will use "net sales" instead of total sales, which is arrived at by subtracting cash discounts, goods returned for credit, and other allowances. It is fine to use net sales in calculating the P/S ratio.

While not quite as useful as the P/E and the P/BV ratio as a valuation measure, the price-to-sales ratio (P/S) comes in quite handy when=>evaluating unprofitable companies, which do not have a P/E ratio. =>P/S ratio can also be used to compare firms within an industry. =>For value investors, a P/S ratio lower than 1.0 often indicates an opportunity, but it's critical to properly account for sales, debt, different costs, and profit margins across firms. The ideal situation for us would be a company with a low P/S multiple and a relatively high profit margin.

Unlike the P/E and P/B ratios, the P/S ratio doesn't involve accounting estimates that can be used by the company to inflate, or even deflate, earnings. That said, companies can still manipulate sales, so we must look carefully at how a company records its revenues.
=>For cyclical companies and turnarounds, we cannot use the P/E ratio when earnings are negative. But as long as the company is not headed for bankruptcy, we can use the P/S ratio to track what the market is willing to pay for its sales. If the company's P/S ratio is much lower than others in its industry, it may indicate a value opportunity. For young companies yet to make a profit, we often look for high sales growth, which we hope will translate into net earnings and, ultimately, free cash flow. The P/S ratio tells us how much the market is paying for sales and gives some indication of value.

Some investors consider a relatively low P/S ratio with a rising stock price (high relative strength) to be a good basis to invest in growth stocks that have suffered a temporary setback.

As with P/E and P/B, the P/S ratio can help compare a stable company's current value to its past valuations. If the current P/S ratio is less than the 10-year average, it may indicate a value.

P/S under the microscope1. Just as the P/E ratio should be considered with earnings growth and the P/B ratio with return on equity, the P/S ratio should be considered in tandem with net margin (also called net profit margin, it's net income divided by total sales).

2. A company can book sales for which it has not yet provided the goods or services, or before a customer is obligated to pay. This is called channel stuffing and leads to inflated sales and earnings, and consequently, lower P/S and P/E ratios. Another warning would be declining cash flows from operations on the cash flow statement even as net earnings rise.

3. Generally a company with higher debt will have a lower P/S ratio, because some of those sales, when converted to cash, have to go toward debt interest and paying down debt -- not to equity holders. When comparing companies with significantly different debt loads, it's best to compare enterprise value-to-sales (enterprise value = market capitalization + debt - cash).

4. A company that earns commissions on total sales may book total sales on its income statement instead of commissions, thereby drastically lowering the P/S ratio. This is perfectly legitimate, but it distorts the P/S ratio.That's just a brief look at the P/S ratio, and I've only touched on a few of the wrinkles associated with it. As a measure of value, P/S is particularly useful for a young growing company, or a company without any earnings, but as with other valuatio

Popular posts from this blog

ICICI Pru Mutual Fund Dividend

ICICI Prudential Mutual Fund has announced dividend under the following schemes: Scheme Dividend ( Rs /unit) ICICI Pru Capital Protection Oriented Ser V Plan B-D 0.03611325 ICICI Pru Capital Protection Oriented Ser V Plan B Direct-D 0.03611325 ICICI Pru Balanced Advantage Direct-DM 0.06 The record date has been fixed as February 08, 2017. ------------------------------ ------ Invest Rs 1,50,000 and Save Tax upto Rs 46,350 under Section 80C. Get Great Returns by Investing in Best Performing ELSS Funds Top 4 Tax Saver Mutual Funds for 2017 - 2018 Best 4 ELSS Mutual Funds to invest in India for 2017 1. DSP BlackRock Tax Saver Fund 2. Invesco India Tax Plan 3. Tata India Tax Savings Fund 4. BNP Paribas Long Term Equity Fund Invest in Best Performing 2017 Tax Saver Mutual Funds Online Invest Best Tax Saver Mutual Funds Online Download Top Tax Saver Mutual Funds  Application Forms For further information contact  SaveTaxGetRich on 94 8300 8300 ------------------------------ ------ Leave y...

What is Financial Freedom?

Invest In Tax Saving Mutual Funds Online Download Tax Saving Mutual Fund Application Forms Buy Gold Mutual Funds Call 0 94 8300 8300 (India)     There were many things common between our Freedom fighters. All had the Single vision (Free India), common goal (independence) and had a disciplined and focused approach. They were ready to do anything and everything and had made so many sacrifices to see India free . But the road to freedom was not easy .They had faced lot many hardships, went to jail so many times and even confronted physical and mental torture from the British. There was one more thing which proved to be an advantage to our fighters that most of them were professional lawyers. The knowledge of legal issues and its impact on our country at large has helped them counter various bills and proposed new laws by the then government. It is due to their continuous effort that we are able to achieve the goal of Independent Indi...

Hidden Bank Fees

  What Banks Hide From Customers Imagine after a peaceful and exciting holiday you receive your bank statement with steep charges. You then rush to your bank and start confronting staff members and to your dismay, you come to know that the high end debit card was charged very heavily. Wouldn't this cause damage to your finances? So remember, the world outside is full of deceptive and double cheating people. Unethical practices are always used by company sales person in order to meet the target. Credit card companies, mutual funds and bank institutions always play dirty tricks to lure customers and the practices are rampant. So here's how you should be careful while dealing with your banks: High End Debit Card Charges While opening an account with a bank you opt for a debit card with minimal charges. But later on when you upgrade your card and opt for high end debit card the annual charge rise by a good amount. Though such a card has slew of features but it all comes at a high ...

Updating a minor PAN card upon becoming adults

  Updating a minor's PAN card once they become adults A PAN card issued in the name of a minor does not contain the minor's photograph or signature, and therefore, cannot be used as a valid proof of identity. Once a minor PAN card holder turns 18, the relevant changes must be made in the PAN records. A new card is then issued bearing a photograph and signature. Application The applicant is required to fill up the "Request for new PAN card andor changes or correction in PAN data" form. The form can be filled up online by accessing NSDL's Tax Information Network website and clicking on the online PAN application tab. Information The applicant must mention the existing PAN number in the application and check the `photo mismatch' and `signature mismatch' boxes, and submit the online form. The form must also be printed out, signed by the applicant, and submitted along with two photographs. Documents Identity and address proof in the form of a copy of the app...

Partial withdrawal from PPF

  Public Provident Fund (PPF) account has a lock in period   If you opened a PPF account to meet your retirement needs,, think twice about withdrawing from this fund before retirement. But provided it's an emergency here are the rules. Public Provident Fund (PPF) account has a lock in period before which you cannot withdraw your money.   The partial withdrawal is allowed after the completion of 6 financial years . This means that you will be allowed a partial withdrawal from 1 April 2017. The maximum partial withdrawal allowed is the least of the following: 50 percent of the account balance at the end of fourth financial year, 31 March 15 50 percent of the account balance of the end of previous financial year, 31 March 17.   There's a loan option available on your PPF account between the fourth and the sixth financial year. You can obtain a loan of up to 25 per cent of the balance in your account. However, this will attract interest of 2 percent more than the prevailing ...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now