The Socialization of Losses
Joseph Stiglitz is one of the most renowned economists of our time. He once criticized the current economic system after the great recession of 2008. He said that the current system is skewed in favor of the rich. This economic system is no longer capitalism. It is a strange combination of capitalism and socialism wherein […]
The South Sea Bubble
The South Sea Bubble is one of the largest asset bubbles that the world has ever seen. In fact, this bubble bankrupted the newly prosperous British economy during the 17th Century. At one point in time, all the money is Britain was not enough to pay down the debts that accrued as a result of […]
The Last Step: Handing Over the Financial Model
Financial models are complex projects which take months or even years to build. It also needs to be understood that the people developing the financial models are not the same people who maintain it over the long term. Hence, there is a need for a formal transition wherein the creator of the model must handover […]
Straight Through Processing in Commercial Lending
Commercial banks all over the world have been forced to adapt to increasing changes in technology. This is because technological changes are shaking the very foundation of the commercial banking industry. However, since commercial banks have been reactive i.e. they have been responding to changes in the environment instead of proactively accepting them, a lot […]
Money Markets vs. Capital Markets
Financial markets are markets where financial instruments or securities are traded. Financial markets can be classified based on various parameters. In order to understand the types of financial markets, we need to first understand the broad categories in which it is subdivided. The broadest classification divides financial markets into two types’ viz. money markets and […]
Price to Sales Ratio = Current Market Price / Reported Sales Revenue
Many companies state their revenue after removing the effects of onetime events whereas others continue to state the revenue without any adjustments.
The price to sales ratio tells an investor how many dollars they are paying for every dollar that the company has in sales. Hence if the price to sales ratio is 3, investors are paying 3 dollars for every dollar in sales. This needs to be benchmarked against the industry average to understand the context.
As in all market value ratios, there is an unrealistic assumption in price to sales ratio too. The assumption is that sales will continue to behave in the same manner for an extended period of time. However, analysts are not so concerned about sales being absolutely flat for an extended period of time. They are more concerned about the average value of sales for the future periods being the same or higher than it currently is.
As an absolute measure, price to sales ratio may not be perfect. However, ration analysis is not about absolute perfection. Price to sales is a better indicator of the fundamentals of the company as compared to price to book value, in the opinion of many critics.
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