These 5 Low Price-To-Sales Stocks Can Garner Solid Returns

Value style is considered one of the best practices when it comes to picking stocks. There are different valuation metrics to determine a stock’s inherent strength but a random selection of a ratio cannot serve your purpose if you want a realistic assessment of a company’s financial position. For this, we would suggest considering Price-to-Sales ratio as one of the key metrics.

A stock’s Price-to-Sales ratio reflects how much investors are paying for each dollar of revenues generated by the company. If 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.

What Makes Price-to-Sales Ratio Attractive?

You must be wondering what makes Price-to-Sales ratio attractive, when the most widely used valuation metric is Price/Earnings. This is so because companies and managements can fiddle with their earnings using various accounting measures but sales are harder to manipulate and hence are relatively reliable.

Again, Price-to-Sales ratio helps to determine the value of stocks that are grappling with losses or are in the early stage of development, generating meager or no profits. While a loss-making company with a negative Price-to-Earnings ratio falls out of investors’ favor, its Price-to-Sales ratio could indicate the hidden strength in its business. This underrated ratio is also used to identify recovery situations or ensure that a company's growth is not overvalued.

However, one should keep in mind that a company with high debt and low Price-to-Sales ratio 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.

What’s the Optimum Strategy?

In any case, Price-to-Sales ratio used in isolation can’t do the trick. One should also analyze other ratios such as Price/Earnings, Price/Book, and Debt/Equity before arriving at any investment decision. Let’s check out the screening parameters for selecting true value stocks.

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