Screen of the Week written by Kevin Matras of Zacks Investment Research:
This week, I'm going to focus on one of my favorite valuation metrics for determining a company's under or overvaluation. Let's first start with a definition.
The Price to Sales ratio is simply: Price divided Sales.
If the Price to Sales ratio is 1, then that means you're paying $1 for every $1 of sales the company makes. A price to sales ratio of 2 means you're paying $2 for every $1 of sales the company makes.
As you might have guessed, the lower the Price to Sales ratio, the better.
A price to sales ratio of .5 means you're paying 50 cents for every $1 of sales the company makes. And paying less than a dollar for a dollar's worth of something is a good bargain.
One of the reasons I like the Price to Sales ratio is because it looks at sales rather than earnings like the P/E ratio does. And sales are harder to manipulate on an income statement than earnings.
Secondly, I'd be hard pressed to find a screen where adding the Price to Sales ratio didn't improve it.
For me, I prefer to look for stocks with a Price to Sales ratio under 1. Although, I'm willing to go up to 4 -- depending on the industry. But I've found that the best way to use it is to find stocks with a Price to Sales ratio below the median for its Industry.
And that's what we'll be focusing on in this week's screen.
For the rest of this Screen of the Week article, please visit Zacks.com at: http://www.zacks.com/commentary/15675/
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