Price Sales Ratio

Last modified 17:46, 1 Oct 2012

Price Sales Ratio


Since earnings can fluctuate due to variables such as a change in accounting practice or how much is spent on research and development, the Price Sales (P/S) figure is used as a more accurate tool to compare value against similar companies.

Also, it is easy to value a company with earnings but what about companies without earnings. A company without earnings is not necessarily a bad company. It could be that it is in the early stages of its life or in recovery from a temporary set back.

Since companies that are starting up rarely have earnings, we need to use another measure to evaluate their value. The price to sales ratio is calculated by dividing the share price by the sales per share. It tells us how much the market is willing to pay for $1 worth of sales.

In this valuation model, the stock price is valued with the current P/S multiplied by the forecast sales per share which has been discounted to its value in the present.

Relative valuation is valuing a company by relating it to the value of other assets and ratios. In the P/E ratio model, the current P/E is compared to the forecast EPS to give a theoretical fair price based on forecast earnings discounted to its value in the present.

User Defined Parameters

Parameters that can be changed by users to change the selected formula's result include the following:

Forecast Sales Per Share

This percentage amount represents the amount of average annual growth in sales anticipated in the period selected in the Earnings Forecast Period setting.

The value for each stock is based on the consensus opinion of financial analysts.

Forecast Earnings Per Share

This ratio is different for every share. It is populated using fundamental data from ValueGain's fundamental data provider based on an average of analyst's forecasts for the company.

Different analysts use different methodologies for calculating this prospective ratio.

Users can substitute their preferred analyst's ratio and recalculate the results.


Fair Value

The Fair Value calculation results are displayed after the calculator name in the Calculator Selection List.

Users cannot directly alter the resulting Fair Value, however changing the highlighted parameters (yellow background and blue outline) will normally result in a change in results for that calculator and any other calculators that use those parameters.

Results in Table and Graphs

Some of the results for the individual stock can be displayed in tables and graphs in the Results Display area on the right side of the work page.

For a detailed description of these tables and graphs, go to the Results Display topic.

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