When you want to determine whether or not an investment in stocks, bonds, or real estate will turn out to be a good decision, it’s crucial to look at the fundamentals of the investment first. One of the most fundamental pieces of information you can get about investments is their valuation ratios. The price-to-sales ratio is one of these fundamental valuation ratios, and it can help you make better investment decisions by giving you important information about what people are paying for each dollar of company sales. Here’s everything you need to know about the price-to-sales ratio so that you can make great decisions with your investments.
The real definition of the P/S ratio
The P/S ratio is calculated by dividing a company’s market capitalization by its revenue. In other words, it’s a way to measure how much you’re paying for each dollar of a company’s sales. If the ratio is high, that means that investors are willing to pay more for each dollar of a company’s sales than if they were looking at companies with lower ratios. For example, according to Bloomberg data on July 18th, 2017, Amazon had a P/S ratio of 2.77 while Nike had one of 0.47
How does a low P/S ratio benefit investors?
A low P/S ratio indicates that a company’s stock is trading at a relatively low price compared to its sales per share. This can be seen as a good thing by investors because it means they are paying less for each dollar of sales generated by the company.
Additionally, a low P/S ratio may be an indication that a company is undervalued by the market and therefore could be a good investment opportunity.
For example, if Company XYZ has a P/S ratio of 1 while Company ABC has a P/S ratio of 10, then Company XYZ would be considered more undervalued than Company ABC.
Investors might see this as an opportunity to buy up stocks in Company XYZ before the prices go up and watch their value grow over time. If a company does not have any competitors and owns a large market share, then its P/S ratio should theoretically be high since its product is valuable and unique.
Keep in mind that there are also factors other than price to consider when investing such as debt level, cash on hand, profits per share, etc.
Is there any other way to evaluate stocks?
The price-to-sales ratio is one of the most important ratios for investors to look at when considering a stock.
This ratio measures a company’s market value per share against its revenue per share, and it can give you a good idea of whether a stock is overvalued or undervalued.
However, it’s important to remember that this is just one tool in your investment arsenal, and it should be used in conjunction with other ratios and metrics before making any investment decisions.
For example, if you’re looking at a small biotech firm with little or no earnings history, then this ratio may not be helpful because the denominator (revenue) will always be zero.
In such cases, you would want to focus on how much profit the company generates as a percentage of total assets, also known as return on assets (ROA). On the other hand, if we were analyzing a company like Apple Inc., which has been profitable for decades now and has an established revenue stream from multiple product lines, then the P/S ratio might be more relevant.
Another very important metric like the P/S ratio is the Price to Book Ratio.
How do I find good stocks with a low P/S ratio?
When looking for stocks with a low P/S ratio, you should first look at the overall market conditions.
If the market is in a downturn, then stocks with lower P/S ratios will be more likely to outperform. Another thing to consider is the company’s history and financials. If a company has consistently strong financials, then it is more likely to weather a market downturn. Finally, you should also look at analyst ratings and price targets.
What if my stock’s P/S ratio goes up?
Generally, if a company’s P/S ratio goes up, it means that its stock price has increased faster than its sales. This could be due to a number of reasons, such as increasing demand for the company’s products or services, positive analyst reports, or insider buying. In general, the higher the P/S ratio is, the more expensive the stock is considered to be.
