| Price
to sales ratio is a less-used type of fundamental
valuation indicator. This valuation focuses
on total revenue.
To calculate
this ratio, take the stock price and divide
by the last 12 months revenue/share (12 month
revenue per share is calculated by the last
12 month revenue combined divided by total number
of shares outstanding). Price to sales ratio
is generally only used for evaluating companies
with volatile earnings.
Studies
have shown that there is a correlation of low
price to sales ratio's and good returns on those
stocks.
These
P/S numbers are categorized as follows;
- under 0.4 is
considered undervalued;
- 0.4 to 0.8 is
average;
- and, a ratio
greater than 0.8 is considered overvalued.
Growth
companies typically have high P/S numbers, therefore,
it is advisable that the scale reflects each
particular industry. This can be done by comparing
P/S numbers for companies in the same industry
group and will help determine how the scale
should be altered.
Also
see:
|
United States
Canada
