PRICE TO SALES P/S

Price to sales ratio, or P/S, is a way of comparing a stock’s value to its own historic market valuation. This is done by dividing the total market valuation of the company by a twelve-month revenue per share average. For example, a company with a stock price of $1.20 and ten million shares would have a valuation of $12 million. If the company had revenue of $24 million in the previous twelve months, one would divide 12 by 24 to get a P/S of 0.5. Price to sales has a number of specific applications in which it is considerably more useful than a P/E, although it must be used cautiously.

Because P/S doesn’t need to look at earnings, it can be used on companies that have no track record of earnings. This makes it ideal for new companies, as it can give an insight into undervalued companies without having to wait for them to start turning a profit. The P/S ratio was widely used during the dot-com years, as investors struggled to determine whether a stock was a good buy or not.

P/S also has applications in market sectors where earnings tend to be cyclical. The automotive industry is a good example of this – the companies may turn enormous profits one year, and then lose for a number of years in a row before turning a profit again. This is not a fault in the company itself, but if subjected to a P/E analysis even the strongest company might appear to have structural faults. Using a P/S analysis is a way to mitigate this, by eliminating the dependence on profits.

Generally, binary option traders and investors look for companies which have a lower P/S, as it indicates a stock that is undervalued by the market. It is particularly important to look at other factors when using P/S, however, as a high annual revenue may not necessarily indicate a structurally sound company. Strong fundamentals are necessary for the market to ever begin to value the company more highly and thus provide profits for a binary option trader or investor .