Heuristics and their role in Finance
Traditional financial theories assume that finance is a scientific field. This means that just like in a scientific problem, a perfect solution exists even for financial problems as well. According to them, investors have the necessary resources and are capable of finding a solution to every problem in the financial domain. In reality, this is […]
Disadvantages of Buy Now Pay Later Financing
In the previous articles, we have already seen what Buy Now Pay Later (BNPL) financing is, how it is implemented as well as the advantages of such financing to merchants. The common viewpoint is that corporations only benefit from implementing Buy Now Pay Later (BNPL) financing. This means that even though individuals might associate disadvantages […]
Public-Private Partnership in Stadium Financing
In the previous articles, we have already seen that funding a stadium can be very difficult from a financial point of view. The financial aspects of stadium financing can be challenging regardless of whether the financing will be provided by the government or by private parties. It is important to note that stadium financing can […]
Why Blockchain May Not be Suitable for Commercial Banking?
As far as technology enthusiasts are concerned, blockchain is the most important invention since the wheel! It is very easy to find literature where technical gurus are praising blockchain as being the solution to all technology-related problems being faced by mankind. This overenthusiasm is the reason that most people believe that blockchain will revolutionize many […]
Government Sponsored Entities
Money market securities are generally issued by firms that have a very strong credit rating. This is because investors do not want their investments to be volatile when they invest in money markets. Hence, they prefer to buy securities only from companies that have a strong credit rating. The government is the most preferable issuer […]
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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