A goal that is underestimated

When price-to-earnings ratios don’t mean much (for example, when the company is making losses or making only minimal profits), you need other metrics to evaluate a stock. In this case, the price-to-sales 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 sounds strange at first is quite easy to explain. Sales are a fixed number that cannot be moved, so PSR is a very reliable metric. The profit, on the other hand, can be manipulated, depending on the type of accounting and the incoming depreciation.

Even if a company does not make a profit due to special charges and therefore P/E cannot be determined, P/E is the most reliable ratio for evaluation.

The same applies to start-ups and many internet companies. Here, despite 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 valuing a business based solely on its sales and not its profits can be misleading.

What does KUV say about the valuation of a stock?

The purpose of stock metrics is simply to show whether a stock is currently cheap or expensive relative to its competitors. This of course also applies to KUV.

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

Conversely, stocks that have 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 share.

The calculation formula for determining the price-to-sales ratio looks like this:

formula

Calculate price to sales ratio (PVR): Method A

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

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

Three practical examples of when it is particularly 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 ratio between price and sales: Company A has a ratio between price and value of 0.9; in 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.

• If we are talking about young companies that are still in the growth phase and are not making 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. Because this will later also have the more favorable price-earnings ratio.

• The chip industry is, for example, particularly exposed to fluctuations. Here, significant profits are made one year, and large losses are suffered the next year. 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 precisely where the weakness lies: In the long term, 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 term.

Conclusion: Recommended as a supplement

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

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

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