Investment in stocks after the analysis of the valuation metrics is considered one of the best practices. When considering valuation metrics, the price-to-earnings ratio has always been the obvious choice. This is because calculations based on earnings are easy and come in handy. However, the price-to-sales ratio is convenient for determining the value of stocks that are incurring losses or in an early cycle of development, generating meager or no profit.
What’s Price-to-Sales Ratio?
While a loss-making company with a negative price-to-earnings ratio falls out of investor favor, its price-to-sales can 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.
A stock’s price-to-sales ratio reflects how much investors pay for each dollar of revenue generated by a company. If the price-to-sales ratio is 1, investors are paying $1 for every $1 of revenues generated by the company. Therefore, 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. The price-to-sales ratio 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 a high debt and a 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, a 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 analyze other ratios like Price/Earnings, Price/Book and Debt/Equity before arriving at any investment decision. Sanofi ( SNY Quick Quote SNY - Free Report) , Medallion Financial Corp. ( MFIN Quick Quote MFIN - Free Report) , Plains All American Pipeline ( PAA Quick Quote PAA - Free Report) and KB Home ( KBH Quick Quote KBH - Free Report) are some companies with a low price-to-sales ratio and the potential to offer higher returns. 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. 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. Value Score less than or equal to B: Here are four of the 10 stocks that qualified the screening: Sanofi manufactures and markets prescription drugs in Europe, the United States and other countries. It focuses on major therapeutic areas, such as immunology, neurology, oncology, rare disease, rare blood disorders and diabetes. Sanofi’s Specialty Care unit is on a strong footing, particularly with the regular label expansion of Dupixent. Dupixent has become the key top-line driver for Sanofi. With outside U.S. revenues accelerating and multiple approvals for new indications, Sanofi’s sales are expected to rise. Sanofi possesses a leading vaccine portfolio. Its R&D pipeline is strong. Several data read-outs are expected in 2023. Sanofi is investing in these launches to optimize their success. Sanofi is the pharma stock with the least exposure to generic competition amongst large drugmakers. SNY currently has a Zacks Rank #2 and a Value Score of A. It has an expected long-term earnings growth rate of 6.9%. Medallion Financial operates as a finance company in the United States. It originates and services a growing portfolio of consumer loans and mezzanine loans in various industries. Key industries served include recreation (towable RVs and marine) and home improvement (replacement roofs, swimming pools and windows). The company has been witnessing continued growth in its consumer lending businesses. MFIN has a Value Score of A and currently carries a Zacks Rank #2. Plains All American, a master limited partnership (MLP) based in Houston, TX, is involved in the transportation, storage, terminalling and marketing of crude oil, natural gas, natural gas liquids and refined products in the United States and Canada. The company’s widely spread Permian Basin operations will allow it to capture the increasing Permian production volume and benefit from the same. The firm’s cost-saving initiatives, JV and asset divestitures will also boost its operations. Plains All American’s expansion of existing pipelines and development of pipeline projects in key production regions of the United States are expected to drive its operations. The firm has enough liquidity to meet near-term debt obligations. PAA 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 Based in Los Angeles, CA, KB Home is a well-known homebuilder in the United States and one of the largest in the state. The company’s Homebuilding operations include building and designing homes that cater to first-time, move-up and active adult homebuyers on acquired or developed lands. KB Home also builds attached and detached single-family homes, townhomes and condominiums. KB Home’s Financial Services operations offer mortgage banking, title and insurance services to homebuyers. The segment generates revenues mainly from insurance commissions and the provision of title services. The company’s growth is driven by the Returns-Focused Growth Plan, which includes the execution of its core business strategy, improving asset efficiency and monetizing significant deferred tax assets. Its long-term growth is attributable to the increase in backlog and its ability to match housing starts to net orders. Also, KB Home’s robust land acquisition strategies assist it to reduce debt and, boost gross margin and returns. The KBH stock currently has a Value Score of A and a Zacks Rank #2. The company has an expected long-term earnings growth rate of 7.1%. You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and test them first before taking the investment plunge. The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your trial to the Research Wizard today. And the next time you read an economic report, open up the Research Wizard, plug your finds in and see what gems come out. . Click here to sign up for a free trial to the Research Wizard today Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. Disclosure: Performance information for Zacks’ portfolios and strategies are available at: . https://www.zacks.com/performance