Valuation Techniques: Discounted Cash Flow, Earnings Quality, Measures of Value Added, and Real Options

P/S

Like P/B, P/S does not explicitly account for the growth or risk of a company. Sometimes P/S is viewed favorably because it is the least subject to accounting manipulations of all the traditional valuation measures. At the same time, P/S is also the number with the least amount of embedded information: It is a long way from the sales line on the income statement to the EPS line, and certainly, a lot of value is made or lost as we go from one to the other. P/S may not be subject to manipulation, but a lot of crucial information is left out.

P/S can be used in the same ways as P/B. For a mature or cyclical company with essentially zero or negative earnings, P/S in conjunction with margin assumptions can identify normalized levels for the next peak earnings or normalized earnings. P/S can be helpful for evaluating companies with large recurring revenue bases or companies with high levels of intangibles. As with P/B, P/S can be used to help differentiate among companies in a homogenous industry.