THE US STOCK MARKET AGAINST THE BACKGROUND OF THE "PRICE-TO-SALES" AND "THE ENTERPRISE VALUE-TO-SALES" RATIOS


Author: Dimiter Nenkov Nenkov

Keywords: stock markets, relative valuation, market ratios, P/S ratio, EV/S ratio, fundamentals JEL: G12, G15, G23, G32

This study is focused on the “price-to-sales ratio” (P/S) and the “enterprise value-to-sales ratio” (EV/S), which are used in relative valuation, in the analysis of companies' performance, as well as in the analysis of different sectors and of the market as a whole. Special attention is paid to certain important requirements, related to the correct interpretation of market and sector averages of these ratios nowadays, including against the background of their historic levels. The identification, justification and use of the proper market ratios requires in-depth knowledge of their essence and of the fundamentals which drive their levels. In this connection, the logic of the fundamental “price-to-sales” (P/S) and the “enterprise value-to-sales”(EV/S) ratios is explained. These two fundamental ratios for the US stock market are calculated and compared with the actual P/S and EV/S. The results of the study are ambiguous. The current level of the actual P/S is much higher than the level suggested by fundamentals. At the same, time the fundamental EV/S supports the level of actual P/S for the US market.

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