CHICAGO, March 21, 2012 /PRNewswire/ -- Stocks in this week's article include: CACI International Inc. (NYSE: CACI), LeapFrog Enterprises, Inc. (NYSE: LF), Navigant Consulting, Inc. (NYSE: NCI), Red Robin Gourmet Burgers, Inc. (NASDAQ: RRGB) and Trinity Industries, Inc. (NYSE: TRN). Kevin Matras explains the Price to Sales ratio and why it's one of his favorite valuation metrics.Kevin Matras of Zacks Investment Research:
The Price to Sales ratio is simply: Price divided by Sales.
If the Price to Sales ratio is 1, then you're paying $1 for every $1 of sales the company makes. A price to sales ratio of 2 means you're paying $2 for every $1 of sales the company makes.
As you might have guessed, the lower the Price the Sales ratio, the better.
A price to Sales ratio of .5 means you're paying 50 cents for every $1 of sales the company makes. And paying less than a dollar for a dollar's worth of something is a good bargain.
One of the reasons I like the Price to Sales ratio is because it looks at sales rather than earnings like the P/E ratio does. Sales are harder to manipulate on an income statement than earnings.
Secondly, I'd be hard pressed to find a screen where adding the Price to Sales ratio didn't improve it.
For me, I prefer to look for stocks with a Price to Sales ratio under 1. Although, I'm willing to go up to 4, depending on the industry. But the best way to use it, I've found, is to find stocks with a Price to Sales ratio below the median for its Industry.
And that's what we'll be focusing on in this week's screen.
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