Price to sales ratio (PVR): An underestimated metric

When price-to-earnings ratios do not matter much (for example, when the company makes losses or makes only minimal profits), you need other metrics to evaluate a stock. In this case, the price-to-sale ratio (PVR) is often consulted.

The KUV has the advantage that it can be determined independently of the profit. It measures the value of a business in relation to sales

What immediately sounds strange is pretty easy to explain. Sales is a fixed number that can not be shaken, so PSR is a very reliable measure. The profit, on the other hand, can be manipulated, depending on the type of accounts and the incoming depreciation.

Although a company does not make a profit due to special fees, and therefore P / E cannot be calculated, P / E is the most reliable key figure for evaluation.

The same goes for start-ups and many Internet businesses. Here, despite a rapidly growing sales, there is often no profit in the first few years. Prominent examples of this are Facebook and Twitter.

At the same time, however, it is important to note that it can be misleading to value a business solely based on its sales and not its profits.

What does KUV say about the valuation of a share?

The purpose of stock measurements is simply to show whether a stock is currently cheap or expensive relative to competitors. Of course, this also applies to KUV.

A stock that has a price-to-market ratio below 1 is generally considered to be cheap and is considered to have an upside potential.

Conversely, shares with a P / S of 1.5 and higher are considered “expensive”.

calculation and interpretation

The price-to-sales ratio shows the relationship between a company’s annual sales and its market value.

“Market value” is the market value of a company (number of shares multiplied by the share price). The rule of thumb is: The lower the P / S, the cheaper you buy a stock.

The calculation formula for determining the price-to-sales ratio is as follows:

formula

Calculate the price-to-sales ratio (PVR): Method A

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The price-to-sales ratio (P / S) compares a company’s market value with its annual turnover. The rule of thumb is: The lower the P / S, the cheaper you buy a stock.

$$ \ bo \ text “KUV” = \ text “Market value” / \ text “Business income” $$

Three practical examples of when it is especially worth looking at KUV:

• You want to invest in the pharmaceutical industry. Your two favorites, two companies that you find particularly interesting, have identical P / E ratios. However, there are differences in the price-sales ratio: Company A has a price-value ratio of 0.9; for company B, on the other hand, KUV is 1.3.

This means: Company A is cheaper than company B. Remember this rule: For established companies that have already completed the start-up and growth phase, a KUV below 1 is considered very cheap.

• In the case of young companies that are still in the growth phase and do not make a profit, it also makes sense to look at KUV. If you assume that the companies in question will generate a similarly high profit margin in the future, the company with the lower PSR is the best choice. For this will later also have the more favorable price-earnings ratio.

• The chip industry is e.g. particularly prone to fluctuations. Significant profits are made here one year, and the next year great losses are suffered. To be able to compare a company with others from the same industry even in a loss year, KUV is a useful tool.

Strengths and weaknesses

The great strength of KUV is its independence from whether the company makes a profit or not. However, this is exactly where the weakness lies: In the long run, a company must have a profit so that you as an investor can make money from it.

A high turnover or a low price-to-sales ratio says nothing about whether an AG is profitable in the long run.

Conclusion: Recommended as a supplement

PSR is a good tool for stock selection when a company (yet) is not making a profit or when earnings estimates are difficult.

However, you should never use this metric alone, but always consider the price-to-book ratio (P / B) and, if possible, the price-to-earnings ratio (P / E) to make an informed assessment.

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