While Price-to-Earnings is the first thing to cross one’s mind while using valuation metrics, 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.

Though a loss-making company with a negative Price-to-Earnings ratio falls out of investors’ favor, its Price-to-Sales could indicate the hidden strength of its business. This underrated ratio is also used to identify 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.

A stock’s Price-to-Sales ratio reflects how much investors are paying for each dollar of revenues generated by the 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 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 more suitable for investment versus a stock with a high Price-to-Sales ratio.

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 and a rise in market cap and ultimately a higher Price-to-Sales ratio.

In any case, the Price-to-Sales ratio used in isolation can’t do the trick. One should also analyze other ratios like Price/Earnings, Price/Book, 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: They must all 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 Style Score less than or equal to B: Our research shows that stocks with a Value Style Score of ‘A’ or ‘B’ when combined a Zacks Rank #1 or #2 offer the best opportunities in the value investing space.

Here are seven of the 20 stocks that qualified the screening:

DiamondRock Hospitality Company (DRH - Free Report) is a lodging focused real estate company, which owns premium hotels and resorts in North America. It operates hotels under the Hilton, Marriott, and Westin brand names in New York, Los Angeles, Chicago, Boston, and Atlanta; and in destination resort locations, such as the United States Virgin Islands and Colorado. This Zacks Rank #2 company has a 3–5 year EPS growth rate of 9.75%. The stock has a Value Score of ‘B’.

Kite Realty Group Trust (KRG - Free Report) is a publicly owned real estate investment trust. The firm invests in real estate markets of the United States. The stock currently has a Zacks Rank #2 and a Value Score of ‘B’. Also, the 3–5 year EPS growth rate for the stock is estimated at 4.8%.

Wolfsburg, Germany-based Volkswagen AG (VLKAY - Free Report) manufactures and sells automobiles in Europe, North America, South America, and the Asia Pacific. This Zacks Rank #1 company has a 3–5 years EPS growth rate of 17.5% and a Value Score of ‘A’.

Hitachi Ltd. (HTHIY - Free Report) produces sells, and services information and telecommunication systems, power systems, social infrastructure and industrial systems, electronic systems and equipment, construction machinery, functional materials and components, automotive systems, and smart life and eco-friendly systems worldwide. It has a 3–5 year EPS growth rate of 13%. The stock currently has a Value Score of ‘A’ and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Citizens Financial Group Inc. (CFG - Free Report) is a bank holding company for Citizens Bank, N.A. and Citizens Bank of Pennsylvania that provides retail and commercial banking products and services in the U.S. This Zacks Rank #2 company’s 3–5 year EPS growth rate is 18.3%. The stock has a Value Score of ‘B’.

The Greenbrier Companies, Inc. (GBX - Free Report) is a manufacturer and seller of railroad freight car equipment in North America and Europe. This Zacks Rank #2 company’s 3–5 year EPS growth rate is pegged at 9.5%. The stock has a Value Score of ‘A’.

Switzerland-based Adecco Group AG (AHEXY - Free Report) provides workforce solutions to businesses and organizations worldwide. It currently has a Zacks Rank #2 and a Value Score of ‘A’. The stock has a 3–5 year EPS growth rate of 6%.