Does P/S Multiple Have Meaning?
All the classes and courses I have undertaken said that, to make apple-to-apple comparison, if you put Sales in the denominator, you must put Enterprise Value in the nominator. However, I have seen, rather often, that banks and firms use P/S to value companies (not just financial institutions that can have negative EV).
I wonder if P/S makes sense? First of all, it's not a good pair. And for companies with very different financial structures, this multiple is absurd to me.
Hope some Monkeys could help with this. Thanks.
Not that I know of. It's either incorrect to compare price / sales multiples, or two other possibilities: 1) "Price" in that context actually refers to enterprise value, or 2) the metric is being applied to companies that universally have no debt (e.g. early stage tech). Although that (2) would also ignore big variances in the amount of cash they have, so it still wouldn't be accurate.
Ken Fischer wrote a book and built an empire around this multiple, so i wouldn't call it useless. Might not make sense all cases. But justified P/S mults are also something the CFA teaches you about.
https://www.forbes.com/sites/investor/2017/05/09/forget-pe-focus-on-pri…
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