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.

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.

Zacks Investment Research

Get The News You Want

Read market moving news with a personalized feed of stocks you care about.

Get The App

Written By: Zacks Investment Research