Rounding out the line of fundamental analysis, we will now look at value for money, what it is, and how it can help in evaluating an investment.
The price-performance ratio (P / S ratio) can also be referred to as the sales multiplier or sales multiplier.
Similar to Value for Money (P / B), a company’s market price is compared to another tax number, in this case sales, to help investors compare companies they may want as an investment.
As with the P / B ratio, you can divide a company’s market capitalization (its share price multiplied by the number of shares outstanding) by its total sales.
Alternatively, you can divide the market share price by the sales per share.
In this case, sales would be over a period of time, typically a year or 12 months.
In general, you would use the last four quarters, also known as the trailing 12 months (TTM), but you can also use the last or current fiscal year (FY).
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For example, if Company XYZ had a share price of $ 20 million and 1 million shares outstanding, its market cap would be $ 20 million.
If XYZ had TTM sales of $ 5 million, the value for money would be 4.
We’d get the same answer if we divided XYZ’s share price of $ 20 by sales per share.
TTM sales of $ 5 million divided by 1 million shares outstanding = $ 5 sales per share. $ 20 / $ 5 = 4.
Numbers don’t live in a vacuum, and a number doesn’t necessarily mean a lot.
However, once you know what the average P / N ratio is for a given industry, you can compare a company’s P / N ratio to the average to see if it might be over- or undervalued.
You can see a company adding a premium to its P / S ratio compared to other peers in its sector, and use that information to take a deeper dive to determine why this might be the case.
Is this company expected to grow more than its peers, which justifies the premium, or does something else cause it to be otherwise overvalued?
Keep in mind that a company may have large sales but may not have any income.
The P / S ratio does not take into account whether a company is currently making profits or will ever make profits.
For example, startups often have no or negative income in the first few years or longer.
A prominent example would be Tesla: The company founded in 2003 had a negative result until 2019. Looking to 2018, Tesla had sales of over $ 21.4 billion.
The P / S ratio does not take into account any debt burden, so it is possible for two companies to have the same P / S ratio, but one company has a huge debt burden while the other does not.
When the P / S ratios are the same, the company with little to no debt is more attractive than another company with high debt.
For this reason, another ratio, the ratio of company value to sales (EV / S ratio), is considered to be superior as it takes into account debt.
However, the calculation involves more steps and is not always readily available. You can use any of the other metrics that we discussed in this series. like debt to equity ratio, current ratio, or fast ratio; to help assess a company’s handling of potential debt.
As we’ve seen with the other metrics we discussed in Fundamental Analysis, you can’t just calculate a number and expect companies to be able to be compared across industries or industries.
They are most useful for comparing peer groups and determining if one company is better than another.
In addition, one metric alone is usually not enough to conclusively identify a particular company.
There are often multiple metrics that need to be evaluated, compared, and further investigation before a clear “winner” can be selected.
For investors interested in longer-term investment opportunities, however, the evidence lies in the pudding.
Take some time to examine whether a company is overvalued or undervalued, how solvent the company is, and what growth potential can have a positive impact on the bottom line of your portfolio.
That’s why you invested initially, isn’t it?
Disclaimer: The information above applies to For educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are unfamiliar with exchange-traded options. All readers interested in this strategy should do their own research and seek advice from a licensed financial advisor.