Friday, December 29, 2006

Price to Sales Ratio (PSR)

This is an important figure to look at. It will give you an idea as to whether a stock is cheap or expensive.

PSR is calculated by dividing the share price by the annual sales per share. The lower the figure is the better. This, of course, must not be taken in isolation to determine whether the stock is worth buying or not. Its usefulness is to compare the valuation of companies within the same industry.

As a rule of thumb, companies with a PSR of less than one are considered cheap. Sales are also known as revenue or turnover.

When the earnings per share increase, sales must increase as well. If they do not, there must be a reason. It is important you know why, to have a better understanding of what is happening.