Tag Archives: Market capitalization

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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Disclaimer: The views expressed in this article are those of the author and may not reflect those of Shiny bull. The author has made every effort to ensure accuracy of information provided; however, neither Shiny bull nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Shiny bull and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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Earnings per share (EPS) 1

Don`t look at only the price of the stock. That is not enough. A stock that is priced at $30 can be cheaper than a stock priced at $10. Some people tend to think that a stock price reflects the value relative to other stocks, but that is terribly wrong!

The price of the shares is completely meaningless to investors that is doing fundamental analysis. The market cap is found by multiplying the per-share price times the total number of outstanding shares. This number gives you the total value of the company or stated another way, what it would cost to buy the whole company on the open market.

The per-share price is changing all the time, and that is why we aren`t so concerned about it. All the companies have a different number of outstanding shares, and that doesn`t tell us what the value of the company is. What we are looking for are the market capitalization (market cap).

You can find the market cap by multiplying the per-share price times the total number of outstanding shares which means what investors need to pay for the whole company on the open market.

Let`s say the stock price is $5. Outstanding shares: 10 million. The market cap is $5 x 10 000 000 = 50 000 000. But, what if Company B have a stock price of $2 and outstanding shares is 100 000 000? Market cap is $200 000 000. So, what company do you want`t own? Stock price $5 or $2?

Do not only look at the per-share prices because it doesn`t tell much. Look for a stock compared to another stock that is similar in the same business. Market cap gives you a better picture of the companys value, and the market put the stocks into three categories:

Small Cap under $1 billion

Mid Cap $1 – $10 billion

Large Cap $10 billion+

The most important thing is to understand the comparing companies of similar size in the same business when you are doing your evaluation. Market Cap is better than evaluating per-share price of a stock. How do you find earnings per-share? I will write more about that next week.

News today: Empire State Manufacturing Index & Import Prices at 8:30am, Capacity Utilization Rate & Industrial Production at 9:15am.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Shiny bull. The author has made every effort to ensure accuracy of information provided; however, neither Shiny bull nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Shiny bull and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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