Price to Sales Ratio: A Poor Indicator of Value

The price to sales ratio is a marginal valuation ratio at best. It is really an offshoot of an antiquated concept of valuing a business. In the past, one of the more common methods to value a business deal was to use a multiplier of sales. It is still used today by many organizations to value a book of business such as a property and casualty insurance agent or the entire firm. If an agent wants to retire, the agent sells his book of business based on a multiple of the revenue he generates. The idea is that the buyer will receive a return on future sales to compensate the buyer for the money paid to buy the book of business.

The price to sales ratio used with business ratios is similar. Simply stated, the price to sales ratio is the entire market value of the company (the price) as a function of revenue (sales). To illustrate, let’s look at some common price to sales ratios for various large companies traded in the market.

Market Price/Sales
Name Capitalization     Sales Ratio
Verizon     $242B    $131B 1.85
3M    $124B       $33B    3.76
Exxon Mobile   $341B     $279B 1.22
Target      $42B      $75B .56

Notice the wide latitude of results?

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Principles of Value Investing

Value investing is defined as a systematic process of buying high quality stock at an undervalued market price quantified by intrinsic value and justified via financial analysis; then selling the stock in a timely manner upon market price recovery.

Value investing is by far the absolute best method to use with your portfolio. The only method that can beat value investing is 'Speculation'. And honestly, speculation is synonymous with gambling. Look at this site's Value Investment Fund results in comparison to eight major indices.

Click to enlarge.

Value Investment Fund's Two 1/2 Year Running Average Annual Return After Quarterly Taxes (28%) = 23.78% Thru 03/31/2022

This site's Value Investment Fund has outperformed all major indices since inception two and half years ago. A 23.78% annual return after taxes (28% tax rate) is simply unheard of with any fund in the market. This Fund's average annual pre-tax return is 31.09%. Here is a list of the major indices and their average annual pre-tax return over the last two and half years:
Businessecon.org's Value Investment Fund 31.09%

- Dow Jones Industrial Average 10.83% S&P 500 18.53%
- S&P Composite 1500 18.37% Russel 2000 13.73%
- NASDAQ 100 30.13% NASDAQ 26.25%
- Invesco QQQ 30.31% Vanguard Growth 24.83%

This exceptional return on capital investment demonstrates unequivocally how the principles of value investing simply outperform all other forms of investing. Only sheer coincidence with one's picks, referred to as 'luck', can beat value investing.

This site's Value Investment Fund's Annual Returns (Pre-Tax Basis):
. 2020 - 34.41%
. 2021 - 41.08%
Year-to-Date Thru 04/30/2022 - .41% (see chart below, click to enlarge)
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