One of the best ways to invest in stocks is after an analysis of the valuation metrics. The price-to-earnings ratio is the most obvious option when it comes to valuing metrics. Calculations based on earnings are straightforward and convenient. The price-to-sales ratio can be used to determine the stock’s value if it is losing money or is in an early stage of development that generates little or no profit.
What’s Price-to-Sales Ratio?
While 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 the business. This ratio can also be used to determine if a company is in a recovery or to ensure that its growth is not too high.
A stock’s price-to-sales ratio reflects how much investors pay for each dollar of revenue generated by a company.
Investors will pay $1 per $1 of revenue if the price to sales ratio is 1. So, 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.
Therefore, a stock that has a lower price/sales ratio is better than a stock that has a high price/sales ratio.
As companies have the ability to manipulate their earnings with various accounting methods, price-tosales ratio is more preferred than price-to earn. Sales are more difficult to manipulate but are reliable.
A company with a high level of debt and a low price to sales ratio is not a good choice. High debt levels will eventually have to be paid off. This will lead to more share issuance, increased market cap, and ultimately, a higher price/to-sales ratio.
The price-to-sales ratio alone will not work in any situation. Before making any investment decision, it is important to analyze other ratios such as Price/Earnings and Price/Book.
AAR Corp. AIR, Signet Jewelers SIG, TravelCenters of America Inc. TA, DCP Midstream, LP DCP ePlus inc. PLUS is a company that has a low price to sales ratio and can offer higher returns.
Prices to sales less than the Median Price for Sales in its Industry The lower the price to sales ratio, the better.
F(1) estimates a lower price to earnings than the Median Price To Earnings in its Industry. The lower the better
Price to book (common equity) is less than the Median Price To Book for its Industry This is another way to guarantee the stock’s value.
The Median Debt-to-Equity ratio for an Industry is lower than the Debt-to Equity ratio (Most Recent). Stable price-to-sales ratios are important for companies with lower debt.
Current Price More Than or Equal To $5 Stocks must trade at least $5 per share or more
Zacks rank lower than or equals #2: Zacks rank #1 (Strong buy) or #2 (Buy). These stocks have a history of outperforming, regardless the market environment.
Value Score below or equal to A: Our research has shown that stocks with a value score of A or B when combined with a Zacks Rank 1 or 2 offer the most value investment opportunities.
These are five of the twelve stocks that passed the screening.
AAR Corp. Provides various services and products to the global aviation and defense industry. The Boeing Company and Airbus are its main customers. AIR continues its strong performance in parts supply as well as program activities. The company’s operating results should be positive due to demand recovery in both the commercial and leisure travel markets. Collins Aerospace has reached a new agreement that may enable it to benefit from the growth opportunities in its jet market.
AAR Corp. and Collins Aerospace have signed a new exclusive distribution contract to supply deicers and support products to the global market. This agreement also reflects AAR Corp.’s expansion into the business jet market, thereby reaping the benefits of the growth opportunities in this space. The company anticipates that parts activities will continue to recover over the next few quarters. AIR currently has a Zacks Rank 2 and a Value Score B.
Signet Jewelers The company is a retailer of watches, diamond jewelry and other products. The company is based in the United States, Canada and the U.K. Signet is often regarded as the largest retailer of diamond jewelry.
Signet’s Inspiring Brilliance strategy focuses on expanding big banners, boosting service revenues, broadening the Accessible Luxury and Value segments, and accelerating digital commerce. SIG currently sports a Zacks rank #1 and a Value Score score of B. It has an annual earnings growth rate (long-term) of 8%.
TravelCenters America In the United States and Canada, it operates standalone restaurants and travel centers. The company’s travel centers offer a wide range of products, including diesel fuel and gasoline as well as diesel exhaust fluid. They also provide truck repair and maintenance and roadside assistance.
TravelCenters of America operates both full-service, quick-service restaurants as well as other customer amenities. It manages restaurants under the franchise agreement. TA currently holds the #1 Zacks Rank and has a Value Score A. You can view the complete list of today’s Zacks #1 Rank stocks here.
DCP Midstream It is a major energy infrastructure company. Fortune 500 firm DCP Midstream has a strong and sustainable business strategy. It boasts a broad portfolio of marketing, gathering and processing assets that span nine states. DCP Midstream’s business model is designed to earn stable fee-based revenues from key midstream assets that are being utilized by shippers and customers over a long period.
DCP Midstream, which is a master limited partner, is located in Denver, CO. The largest midstream player is betting on strong fee-based earnings from its long term contracted business in logistics and marketing. DCP stock currently holds a Zacks rank #1 and a Value Score score of B.
Herndon, VA-based ePlus The company provides information technology (IT), which enables organizations to optimize their IT environment, and supply-chain processes. It operates both in the United States of America and internationally. ePlus is available to commercial entities, state, local, and government contractors as well as educational institutions.
ePlus is seeing solid demand for its modern data center, security and networking solutions. The company is committed to long-term sustainable growth. It continues to invest in talent, expand its capabilities and capture share in high-growth markets. Current values are A and Zacks rank #2.
Register now to get your 2-week trial of the Research Wizard. You can then start trading with this screen. You can also create your strategies and then test them before making an investment.
Research Wizard is an excellent place to start. It is simple to use. Everything is explained in plain English. It is very intuitive. Get started with your trial of Research Wizard today. Open the Research Wizard and start reading an economic report.
Click here to register for a free trial with the Research Wizard.
Disclosure: Zacks Investment Research officers, directors and/or employees may have sold or bought short securities, and/or held long or short positions in options mentioned in this material. A related investment advisory firm might own or have sold short securities, and/or may hold long or short positions in options mentioned in this material.
Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance.
Get the most recent Zacks Investment Research recommendations. You can now download 7 Best Stocks to Watch in the Next 30 days. Click to get this free report