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. Barnes Group Inc. ( B Quick Quote B - Free Report) , ePlus ( PLUS Quick Quote PLUS - Free Report) , G-III Apparel, Ltd. ( GIII Quick Quote GIII - Free Report) , Pampa Energia S.A. ( PAM Quick Quote PAM - Free Report) and UFP Industries ( UFPI Quick Quote UFPI - 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 five of the 16 stocks that qualified the screening: Barnes is a global diversified manufacturer and provider of highly engineered products, innovative solutions and differentiated industrial technologies. The company’s product and solution offerings include plastic injection molding technologies, robotic grippers, automation components, fine-blanked solutions, high-performance precision components and engineering solutions. Barnes is poised to benefit from its focus on innovation and solid operational execution. Strength in the Aerospace unit due to healthy aftermarket businesses, including maintenance, repair and overhaul, and spare parts (RSP programs) sales, is benefitting the company. Robust Original Equipment Manufacturing order bodes well for the segment. Its measures to reward shareholders through dividends are encouraging. Barnes currently has a Value Score of B and a Zacks Rank #2. The company has an expected long-term earnings growth rate of 10%. Herndon, VA-based ePlus is a provider of information technology (IT) solutions that enable organizations to optimize their IT environment and supply-chain processes. It operates in the United States and internationally. ePlus serves commercial entities, state and local governments, government contractors, and educational institutions. ePlus is benefiting from the solid demand for its security, modern data center and networking solutions. PLUS remains focused on driving sustainable, long-term growth by continuing to expand its capabilities, investing in talent and capturing share in targeted high-growth market segments. The company has a Value Score of A and currently flaunts a Zacks Rank #1. You can see . the complete list of today’s Zacks #1 Rank stocks here G-III Apparel is a manufacturer, designer and distributor of apparel and accessories under licensed brands, owned brands and private label brands. The company’s portfolio includes outerwear, dresses, sportswear, swimwear, women’s suits and women’s performance wear, as well as women’s handbags, footwear, small leather goods, cold weather accessories and luggage. This New York-based company has a portfolio of more than 30 licensed and proprietary brands, including five major global brands — DKNY, Donna Karan, Calvin Klein, Tommy Hilfiger and Karl Lagerfeld. G-III's owned brands include Donna Karan, DKNY, Vilebrequin, G. H. Bass, Andrew Marc, Marc New York, Eliza J and Jessica Howard. GIII currently has a Value Score of A and sports a Zacks Rank #1. The company has an expected long-term earnings growth rate of 15%. Pampa Energia is an independent energy integrated company in Argentina. Through its subsidiaries, the company is engaged in the generation, transmission and distribution of electricity in Argentina. PAM operates through Electricity Generation, Oil and Gas, Petrochemicals, and Holding and Other Business segments. It generates electricity through thermal generation plants, thermal gas-fired generation plants and hydroelectric power generation systems, as well as a wind farm. The company also explores for and produces oil and gas, and operates a high-voltage electricity transmission network. Pampa Energia produces petrochemicals, such as styrene, styrene butadiene rubber and polystyrene. In addition, it engages in gas transportation and advisory services activities. PAM currently has a Zacks Rank #2 and a Value Score of A. Grand Rapids, MI-based UFP Industries is a holding company with subsidiaries throughout North America, Europe, Asia and Australia. It supplies wood, wood composite and other products in retail, industrial and construction markets. The company has been gaining from the diversity of markets, higher organic unit sales, solid contributions from buyouts, product innovation and an improved pricing model. UFP Industries' industrial and construction segments are experiencing favorable growth trends and profitability, given normalized retail demand. UFP Industries is poised to benefit from a solid U.S. residential market, and demand for repair and remodeling activities. Also, buyout gains and shareholders' rewards are expected to work in its favor. The UFPI stock has a Value Score of A and it currently sports a Zacks Rank #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