Price to sales ratio (P/S)

When you evaluate companies, you have many tools to use. You can do the research by looking at the numbers in companies that have made money in the past. The tools I have been written about earlier is very useful.

But what if a company don`t have any earnings? Is it a bad investment? Not necessarily, but you should be very careful with companies with no income history.

The tech bubble is a good example. Many companies didn`t have earnings history and some of them didn`t have products either. That was the 90`s. Fortunately. However, sometimes you find a great company that is worthy of consideration. Therefore, you need to measure the young companies without the earnings.

You can calculate like this:

P/S = Market Cap / Revenues
or
P/S = Stock Price / Sales Price Per Share

Price to Sales (P/S) ratio is a tool you can use and the lower the P/S the better the investment is because you are paying less for each unit of sales. However, sales do not reflect the whole picture as the company may be unprofitabel with a low P/S ratio. This ratio is usually used only for unprofitable companies. That is because they don`t have a price-earnings ratio (P/E).

Like the other tools I have been writing about, you shouldn`t use only one of them to determine your investments. Especially, when you are dealing with young companies, you will have a lot of questions to answer and the P/S ratio is only one of them. Remember; Microsoft was without earnings at the beginning of their carreer.

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