Current market is in frothy valuation and all the great compounding stories are richly valued. On the other hand in microcap space under market cap of 500 crores lot of companies are available at market capitalization which is less than its total Sales. Can we use this criteria to find mispriced bets which can go up with time???
Also if companies coming out from loss and in turnaround phase price to earning ratio is immaterial, but if a company is available at fraction of its total revenue I think it is going to be a great stock.
Hope the pioneers here in the group add their valuable experience and help all of us looking for this type of bargain hunting???
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P/S can be a starting point for investigation (like any other fundamental ratio) but should not be used as the sole criteria to pick investments.
At best try as one of attribute for stock screening, not beyond that.
- The P/S is bit cleaner as the creative accounting practices are applied to manage earnings rather much sales.
- Sales are not volatile as one time earnings doesn’t creep in. Most of P/S available on website is basis total income/mcap. You make sure to take revenue from operations/mcap.
- P/S works as you said even with losses.
Now the problems:
- Sales does not indicate worth a bit either it’s profitability or cash flow.
- Trading companies will always show lower P/S ratios. Even retail.Margin of these industries are dismal.
In one line, don’t use a single variable, may be an attribute. But make sure you compare P/S of one year with historical data of same company. Second peer comparison within same industry.
P/S <1 may not be an appropriate way to go about in my opinion.
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