The price-to-sales ratio, also known as PS, is an indicator invented by Ken Fisher, the son of investment guru Philip Fisher, to reflect a company's ability to generate cash flow, calculated by comparing the stock price to sales per share, or the market value to the income from the main business
The price-to-sales ratio is the sales volume of the enterprise, as long as the sales are stable, you can use the price-to-sales ratio to make comparisons between the same industries. In the case of similar stock prices, the smaller the price-to-sales ratio, the higher the company's sales, more competitive products, more cash flow, and the higher the probability of buying a good company.
The price-to-sales ratio is also suitable for some loss-making enterprises, or growth enterprises with low profits, such as asset-light Internet companies, which are more suitable for valuation. In China, the price-to-sales ratio is rarely used for valuation due to the small number of listed Internet companies, but the situation is different in the US stock market. There are many Internet companies in the U.S. stock market, and the profits of these companies are very unstable, and even long-term losses, and their net assets are not much, so they cannot be valued by the price-earnings ratio and price-to-book ratio, but only the price-to-sales ratio, because the sales of these companies are relatively stable.
The advantage of the price-to-sales ratio is that it has a wide range of applications, even if an enterprise does not have much profit, as long as it has operating income, it can be valued by the price-to-sales ratio, especially suitable for high-tech Internet enterprises with light assets, high revenue and low profits. However, there are also two disadvantages of using the price-to-sales ratio for valuation, one is that it cannot reflect the leverage, and the difference between the revenue created by the company's own funds and the revenue created by adding 10 times leverage is very large; The second is that it cannot reflect the quality of revenue, that is, it is impossible to know whether the enterprise is profitable or loss-making.
Therefore, before we use the price-to-sales ratio to valuation, we must first understand the profit model of this company. For example, if you are optimistic about an e-commerce company, you must first determine whether its money-burning development model is temporary, and whether the profits can be released when the expansion stops in the future. In addition, the price-to-sales ratio must be compared with the same industry, for example, JD.com and Pinduoduo can be compared, but it is meaningless to compare Alibaba and Moutai.