A stock's current price may not reflect its long-term worth. Short-term factors, including changing expectations, may cause investors to overvalue or undervalue a stock. One alternate metric, the selling or price/sales ratio, compares the stock's price to the company's sales. A high selling ratio, such as one above 3, indicates an overvalued stock that offers potential for short-selling. A low selling ratio can indicate a good investment, because investors effectively pay less for each sale in which they share.
1. Add together the company's sales from the previous four quarters. For example, if a company's last four earnings reports have stated earnings of $700,000, $800,000, $950,000 and $730,000, add them together to get $3,180,000.
2. Divide this 12-month revenue by the number of shares that the company has issued, another figure that the earnings report states. For example, if the company had 100,000 outstanding shares, divide $3,180,000 by 100,000 to get $31.80, the company's sales per share.
3. Divide the current stock price by the company's sales per share. For example, if the company's stock currently trades at $45 a share, divide $45 by $31.80 to get 1.415. This is the stock's selling ratio.
- Selling ratios offer limited information. A more comprehensive analysis of a stock must consider factors such as the company's debts and liabilities, which will affect its future earnings.
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