A stock’s price-to-sales ratio reflects how much investors are paying for each dollar of revenues generated by a company.

If the price-to-sales ratio is 1, it means that investors are paying $1 for every $1 of revenues generated by the company. So, it goes without saying that a stock with a price-to-sales below 1 is a good bargain, as investors need to pay less than a dollar for a dollar’s worth.  

Thus, a stock with a lower price-to-sales ratio is a more suitable investment than a stock with a high price-to-sales ratio.

Investment in stocks made after analysis of valuation metrics is usually considered one of the best practices. When considering valuation metrics, price-to-earnings ratio has always been the obvious choice. This is because calculations based on earnings are easy and come in handy. However, price-to-sales has emerged as a convenient tool to determine the value of stocks that are incurring losses or are in an early cycle of development, generating meager or no profits.

While a loss-making company with a negative price-to-earnings ratio falls out of investor favor, its price-to-sales could indicate the hidden strength of the business. This underrated ratio is also used to identify a recovery situation or ensure that a company's growth is not overvalued.

Price-to-sales is often preferred over price-to-earnings as companies can manipulate their earnings using various accounting measures. However, sales are harder to manipulate and are relatively reliable.

However, one should keep in mind that a company with high debt and low price-to-sales is not an ideal choice. The high debt level will have to be paid off at some point, leading to further share issuance, rise in market cap, and ultimately a higher price-to-sales ratio.

In any case, the price-to-sales ratio used in isolation cannot do the trick. One should also analyze other ratios like Price/Earnings, Price/Book, and Debt/Equity before arriving at any investment decision.

Screening Parameters

Price to Sales less than Median Price to Sales for its Industry: The lower the price-to-sales ratio, the better.

Price to Earnings using F(1) estimate less than Median Price to Earnings for its Industry: The lower, the better.

Price to Book (common Equity) less than Median Price to Book for its Industry: This is another parameter to ensure the value feature of a stock.

Debt to Equity (Most Recent) less than Median Debt to Equity for its Industry: A company with less debt should have a stable price-to-sales ratio.

Current Price greater than or equal to $5: The stocks must be trading at a minimum of $5 or higher.

Zacks Rank less than or equal to #2: Zacks Rank #1 (Strong Buy) or 2 (Buy) stocks are known to outperform irrespective of the market environment.

Value Score less than or equal to B: Our research shows that stocks with a Value Score of A or B when combined with a Zacks Rank #1 or 2 offer the best opportunities in the value investing space.

Here are seven of the 16 stocks that qualified the screening:

AutoNation, Inc. (AN - Free Report) is the largest automotive retailer in the United States. The company also offers vehicle maintenance and repair services, vehicle parts, extended service contracts, vehicle protection products, and other aftermarket products. In addition, it arranges financing for vehicle purchases through third-party sources. The stock currently has a Value Score of A and a Zacks Rank #1. It has a 3–5 year EPS growth rate of 4.7%.

Korea Electric Power Corporation (KEP - Free Report) is an integrated electric utility company that generates, transmits and distributes electricity in Korea and internationally. Based in Naju, South Korea, the company generates power from nuclear, coal, oil, liquefied natural gas, internal combustion, combined-cycle, integrated gasification combined cycle, hydro, wind, solar, fuel cell, biogas, and other sources. The stock currently has a Zacks Rank #2 and a Value Score of A. It has a 3–5 year EPS growth rate of 5%.

Rocky Brands (RCKY - Free Report) is a manufacturer and seller of footwear and apparel in the United States, Canada and internationally. It sells products under the Rocky, Georgia Boot, Durango, Lehigh, Creative Recreation, and Michelin brands. The stock currently has a Value Score of A and a Zacks Rank #1.

World Fuel Services Corporation (INT - Free Report) is a leading global fuel services company, engaged in the distribution of fuel, and related products and services in the aviation, marine, and land transportation industries. The 3-5 year EPS growth rate for the stock is estimated at 5%. The stock currently has a Value Score of A and a Zacks Rank #2. 

Universal Forest Products, Inc. (UFPI - Free Report) is a holding company with its subsidiaries throughout North America, Europe, Asia, and Australia. The company supplies wood, wood composite, and other products in retail, industrial, and construction market. The company currently has approximately 204 facilities and parcels of land located throughout the United States, Canada, Mexico, Europe, Asia, and Australia. The stock currently has a Zacks Rank #1 and a Value Score of B.

Standard Motor Products, Inc. (SMP - Free Report) is one of the leading manufacturers, distributors, and marketers of premium automotive replacement parts for engine management and temperature control systems. It majorly focuses on heavy-duty industrial and the original equipment market. The stock currently has a Zacks Rank #1 and a Value Score of B.

Preferred Apartment Communities, Inc. (APTS - Free Report) is a Maryland corporation formed primarily to own and operate multifamily properties. It also, to a lesser extent, owns and operates student housing properties, grocery-anchored shopping centers and strategically located, well-leased class A office buildings, all in select targeted markets throughout the United States. The stock currently has a Zacks Rank #2 and a Value Score of B.