Market cap to Sales Ratio - An insight
Printed From: The Equity Desk
Category: Market Strategies
Forum Name: Equity Valuation Techniques
Forum Discription: While valuing equities no individual technique works. Mostly it is a combination of techniques. Discuss the various techniques in equity valuation ranging from PE to RoE to Market Cap
URL: http://www.theequitydesk.com/forum/forum_posts.asp?TID=824
Printed Date: 20/Apr/2025 at 5:32pm
Topic: Market cap to Sales Ratio - An insight
Posted By: prosperity
Subject: Market cap to Sales Ratio - An insight
Date Posted: 24/Mar/2007 at 11:22am
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Basantji,
I apreciate what PE means and what is the impact of its derating/re-rating
But Market Cap to Sales is one ratio which i am NOT able to understand in terms of what is the significance of this ratio ... what all can we understand by looking at this ratio and is it an important parameter to look at ...
I searched TED by using this keyword ... found one interesting link on market cap to sector's market opportunity - that was an interesting read ..
http://www.theequitydesk.com/forum/forum_posts.asp?TID=259&KW=market+cap+sales&PN=4 - http://www.theequitydesk.com/forum/forum_posts.asp?TID=259&KW=market+cap+sales&PN=4
BUT I STILL HAVE NOT UNDERSTOOD THE SIGNIFICATION AND IMPACT AND COMPARISION OF SECTORS/COMPANIES BASED ON THIS RATIO...
Kindly explain and also pls. point me to links that i should read for a deeper insight...
Thanx !
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Replies:
Posted By: basant
Date Posted: 24/Mar/2007 at 11:59am
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I tried putting that point across in that link still let me try again. See we try to see the market cap of a company and then compare it with the total sale of the entire sector for example if the total spend of multiplex is Rs 5000 crores per year in india and PVR trades at Rs 2500 crores then the sector is almost very well saturated this happened with the software companies in 2000 when each of the companies traded at market caps to over the entire sale of the sector.
Generally it is not that market cap to sales have one defined value that is for low margin companies it could be 1 times and for high margin companies it could extend upto 10 times also. The practice is to go for peer group comparisions for this for example compare infy with wipro on mkt cap to sales and not infy with Tata Steel.
------------- 'The Thoughtful Investor: A Journey to Financial Freedom Through Stock Market Investing' - A Book on Equity Investing especially for Indian Investors. Book your copy now: www.thethoughtfulinvestor.in |
Posted By: prosperity
Date Posted: 26/Mar/2007 at 7:40pm
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Basantji,
Thanks for your explaination of market cap of a company to total sale (opportunity) of the sector ...
But actually, i was asking a more basic and different question... Maybe i was unclear ... So i'll try to re-phrase my question :
Out of all the financial ratios like PE, PEG, RONW, ROCE, Profit Margin etc - i do NOT understand the significance of Market Cap of A COMPANY to Sales of SAME COMPANY ....
Why is this ratio needed to be computed - the picture it shows would always be in-conclusive because -
A) Market Cap = No. of shares * Market Price, so numerator has market price in it and hence it reflects how much over-valuation or under-valuation is given by market ... BUT IT DOES NOT HAVE ITS DENOMINATOR CORRECT !!
Because denomiator is sales .... sales are done by deploying total capital (which includes debt component also) ... but numerator does not depend on that debt (since it has only equity part multiplied by PE but not the debt part !!) and denominator depends on debt ...
In other words, if 2 companies in same sector does same sales and have same market cap ... this ratio would be same for both of these .... But if first one has 3:1 Debt:Equity Ratio and second one has 1:1 Debt/Equity ratio ... then this ratio is not a correct measure to compare 2 companies in the same sector also .... Agree ? Comments ?
B) Profitability cannot be know by this ratio ... as in if a company in same sector has high profit margin but is undervalued and another company in same secto has low profit margin but is overvalued ... then also Market Cap to Sales would be same for both these companies ... So what's the use of this ratio ... Neither can we infer overvaluations nor can we infer profit margin from this ratio - infact it cancels these two if they are in opposite direction....
Pls. review my above thoughts, and if they are true, i am confused as to why this ratio exists ?
For what purpose is this ratio used for ... there are inherent flaws in this ratio when i think that this ratio IGNORES A) DEBT B) PROFIT MARGIN C) VALUATIONS !!
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Posted By: Vivek Sukhani
Date Posted: 26/Mar/2007 at 8:10pm
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Well... excellent question but this ratio has its significance in some cases. Actually, the underlying assumption is market price captures all.... so if co. has high gearing, its market price will be low and hence sales to market cap will be high....so that would make it a avoid. Actually,market price has very important determinant in the form of gearing.however, I also think that Sales to economic Value can be a better reflector than sales to market cap.
prosperity there is no tell-all ratio.... so you cannot get a magic in one ratio I fear. This is a wonderful ratio in cases where the company has a huge turnover.... like petrochemicals, Energy, FMCG, paper, Consumer Durables, Commodities. You cannot apply such ratios for a services company....Actually, it shows whether market price equals sales/share.... you may ask what fun if it is less, equals or exceeds????? but someway down the line, it is perceived that sales because its less difficult to manipulate is a better reflector that Profits, and hence its importance in our circles....
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Posted By: Vivek Sukhani
Date Posted: 26/Mar/2007 at 8:12pm
| And franly speaking, I also find it better than P/E.... |
Posted By: basant
Date Posted: 26/Mar/2007 at 10:04pm
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I go by Vivek's explanation:
1) Sales are difficult to fudge - No change in depreciation/stock/policy can change the ratio
2) To negate the debt effect we look at EV/EBIDTA or EV?Slaes also. EV = EQuity + debt
3) This is a subjective ratio tells us how companies are placed within a sector not a tool for actual price projection.
4) As I indicated this is used to compare companies in the same sector so in a sector profit margins are and should always be round about the same but cannot compare Infy with Reliance.
------------- 'The Thoughtful Investor: A Journey to Financial Freedom Through Stock Market Investing' - A Book on Equity Investing especially for Indian Investors. Book your copy now: www.thethoughtfulinvestor.in |
Posted By: prosperity
Date Posted: 26/Mar/2007 at 1:17am
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Thanks Vivek and Basantji - but both of you have only answered the first part i.e. ignoring debt part ...
But my second part about valuations and profit margins have not been answered ... i'll try to convey my point in a more lucid example :
There is SOME LOGIC built into this ratio which would DEFINATELY MAKE IT GO WRONG !! even with companies of same sector ...
1) Company A of one sector let's say has 5% better profit margin than average of that sector and Company B of same sector let's say has 5% lesser profit margin than average of that sector
2) Assume that both companies are debt free.
3) Lets assume No. of outstanding shares of both companies are same ...
4) Hence total capital employed would also be same
5) Assume that for both companies, there is no money as "reserves and surplus" accumulated from previous yrs.
6) But since profit margins of Company A is more than B by around 10%
Hence on same capital employed (cost price), sales of Company A would be more than sales of B by around 10%
7) Assume that today, market is giving same valuations to both A and B i.e. PE of both A and B are almost same ... Since earnings of A are 10% more then B, hence A has 10% more market price than B
CONCLUSION: Then this ratio Market Cap to Sales would be same for both the company ! A would have both numerator and denominator - both more by 10% !!
And this is happening in the same sector ... (variation of profit margin of +/- 5% within sector is there and i wanted to use this ratio to find out which is better company in that secto !!)
Then on basis of the same value of this m-cap/sales ratio ... how can i decide which one i should be picking ?
IN ABOVE CASE, WE SHOULD BE PICKING "COMPANY A" BECAUSE EVEN THOUGH COMPANY A HAS 10% MORE PROFIT MARGIN BUT STILL IS AVAILABLE AT SAME PE AS COMPANY B FROM SAME SECTOR...... LOOKING AT M-CAP/SALES RATIO, WE CAN'T MAKE THIS INFERENCE BECAUSE M-CAP/SALES IS SAME FOR BOTH COMPANIES A AND B
Basantji, Vivekji,
Can you explain me where i went wrong in my above analysis ? Thanx !!
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Posted By: basant
Date Posted: 26/Mar/2007 at 10:29am
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Assuming that market cap to sales is equal. Like we discussed earlier market cap to sales is not the only tool but is a part of one of the many tools - also even if a company trades very attractively on market cap to sales basis it does not mean that we go out and buy it but it just indicates the broad spectrum of things. Now you could argue that what is the need but then we are not using it as the ultimate valuation tool.
Left to itself there is no comparable valuation tool PE,Dividend yield, EV/EBBIDTA are all parts of the bits and pieces puzzle!
In this case we would take an overall view by looking at all the tools not just one.
Now if two companies have equal PE's or PEG's we do not buy both we look at RoE, dividend yield etc before framing an opinion. ------------- 'The Thoughtful Investor: A Journey to Financial Freedom Through Stock Market Investing' - A Book on Equity Investing especially for Indian Investors. Book your copy now: www.thethoughtfulinvestor.in |
Posted By: prosperity
Date Posted: 26/Mar/2007 at 10:56am
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Thanks for your explainations ! ------------- |
Posted By: Vivek Sukhani
Date Posted: 26/Mar/2007 at 11:11am
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prosperity,
Kindly explain point#6.10% better margin doesnt imply 10 percent higher sales, or does it?
regards,
Vivek
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Posted By: prosperity
Date Posted: 26/Mar/2007 at 11:46am
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Vivek, (Basantji,) Good ... that was the weak link and you caught it !!
On same cost price (total capital employed) if profit margins are 10% ... then sale price would also be higher but not by 10% ... it might be by 3-5% (depends on how much is the absolute profit margin of that company)
I initially wanted to take that example .. but later for sake of simplicity - i overly-simplified it ... and you correctly caught it !!
But lets say that market is giving lower PE to company A than company B eventhough the profit margin of company A is more ... [Can be because B is sector leader, etc.]
Then this ratio DECIEVES YOU ... since for company A, sales are 3-5% higher and because of lower PE - market price of company A would also be 3-5% lesser ... in effect the ratio market-cap/sales for company A would have lesser numerator and higher denominator ... and this RATIO WOULD WORK AGAINST YOU AS IT WOULD INCORRECTLY SHOW THAT COMPANY B IS BETTER !!
EVEN THOUGH COMPANY A IS BETTER ON 2 COUNTS - A) lower PE b) higher profit margins !!
But here 2 positives of companies cancel each other (in numnerator and denominators) and becomes an ARTIFICAL NEGATIVE FOR THAT COMPANY !!
Some ratios tell somethings and not everythings ... But this ratio is telling WRONG THINGS !!
Basantji ?
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Posted By: Vivek Sukhani
Date Posted: 26/Mar/2007 at 11:57am
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Prosperity, lower market cap to sales is a positive indicator and not a negative indicator. Also, some more points... 1.Capital Employed and Costs are different stuff....Something like Loans and Advances does nothing to cost but increases the capital employed. 2.Its not very probable, that a company with better margins be alloted inferior multiples.... the most probable reason why a sector leader is a sector leader is generally better cost management, the other(inverse) way of looking at margin management |
Posted By: Vivek Sukhani
Date Posted: 01/Apr/2007 at 10:15am
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There is another important reason why market cap to sales is considered to be an important indicator. Sales is considered to be the cause of profits. So, if you ever locate a company with decling market cap to sales ratio but whose OPM is showing signs of an increase, thats a wonderful entry point. Also remember, sometimes a comopany's P/E may be made to look artificially high, by debiting a huge amount in depreciation and amortisation. And companies which retain a huge chunk of cash through depreciation charge, should always be carefully looked into. One should always look into how much assets a company is putting under impairment... these are book-entry debit entries, but do wonders to the profit and loss account of the coming period. |
Posted By: wise_man
Date Posted: 27/Feb/2008 at 12:36pm
hey can someone teach me how to evaluate Market cap to Sales Ratio of a company can anyone plz beak it down with an example plz.? i have been trying to evaluate it but allways come to the wrong figure is it this P/S = (Stock Price) / (Sales Per Share) = (Market Capitalization) / (Total Sales)
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Posted By: basant
Date Posted: 27/Feb/2008 at 1:03pm
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A company with a mkt cap of Rs 2000 crores and a sales of Rs 1500 crores will be termed as trading at 2000/1500 or 1.33 times mkt cap to slaes. The Mkt cap comes on the numerator.
------------- 'The Thoughtful Investor: A Journey to Financial Freedom Through Stock Market Investing' - A Book on Equity Investing especially for Indian Investors. Book your copy now: www.thethoughtfulinvestor.in |
Posted By: kulman
Date Posted: 27/Feb/2008 at 1:50pm
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Isn't it other way around?
Mkt Cap/Sales=2000/1500 so trading at a ratio of 1.33.
And it is same as (Price per share)/(Sales per share) ratio.
------------- Life can only be understood backwards—but it must be lived forwards |
Posted By: basant
Date Posted: 27/Feb/2008 at 1:57pm
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Oh! I am back to the basics. Changed by previous post. ------------- 'The Thoughtful Investor: A Journey to Financial Freedom Through Stock Market Investing' - A Book on Equity Investing especially for Indian Investors. Book your copy now: www.thethoughtfulinvestor.in |
Posted By: johnnybravo
Date Posted: 27/Feb/2008 at 2:30pm
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kulmanji, just recollected, when we met, you talked about mcap to profits ratio for L&T and its comparison with FD's - i couldn't get that comparison, can you please throw some moonlight on it? ------------- Saab Moh Maya hai! |
Posted By: Vivek Sukhani
Date Posted: 27/Feb/2008 at 7:54pm
Johnybravo Sir, Jab You Met Kulman Sir, why were you discussing so very complicated things.....?????? By the way, Market Cap to Profits, and in case Profits mean Net Profit, is nothing but P/E ratio......!!!!
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Posted By: johnnybravo
Date Posted: 27/Feb/2008 at 8:00pm
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sukhaniji, ofcourse, but what relation can a PE have with returns from FDs? high or low PE its a market perception - nothing to do with practical returns one can get. Thoda context bhi samajh lo bhaya, mana ki tussi genius ho, tussi genius hi nahi tussi indigenous ho!! ------------- Saab Moh Maya hai! |
Posted By: Vivek Sukhani
Date Posted: 27/Feb/2008 at 8:10pm
Now thats a different matter......but in my humble opinion, Kulman Sir se milne ke baad yeh sab baat......??????? Thats why I gave that post.
Now, Mcap to profits does have a linkage with FD returns. The inverse of P/E is E/P which is what gets compared with the FD returns. Some quants trade on the basis of these 2 yield differences.....
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Posted By: johnnybravo
Date Posted: 27/Feb/2008 at 8:17pm
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now we indeed had a talk about a lot of other things but those things lie outside the purview or rather the mandate of TED and kulman has an image of being a sajjan on this forum. ------------- Saab Moh Maya hai! |
Posted By: Vivek Sukhani
Date Posted: 27/Feb/2008 at 8:23pm
Thats much much better.....wahi mein soch raha tha that Kulman Sir talking about such silly things as P/E etc etc.....
Thanks for clarification.....
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Posted By: kulman
Date Posted: 27/Feb/2008 at 8:47pm
The last time I talked about PE was while asking directions to the loo in a restaurant.
------------- Life can only be understood backwards—but it must be lived forwards |
Posted By: Vivek Sukhani
Date Posted: 27/Feb/2008 at 10:28pm
And that must be a long long time back.....for, to expect a middle aged man to ask anyone, where is the place I can use to pe(e), is horribly melodramatic......
Kulman Sir, sorry to make you feel like a middle aged man through this post.....
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Posted By: kulman
Date Posted: 27/Feb/2008 at 10:40pm
No problem Vivek bhai. Today is your day.
But let me warn you with dire consequences....
If you try to pull a fast one one me.....
I will.....
......I'm warning you.....
I will.....
....ask IDBI to send Ms Mukadam to meet Albert David, Ultramarine, Kabra Extru, Foseco.......
------------- Life can only be understood backwards—but it must be lived forwards |
Posted By: Vivek Sukhani
Date Posted: 27/Feb/2008 at 8:13am
For a moment, I got the shudder of my life.......but then I will be only happy if the woman casts her spell on the stock prices. As I have always indicated, with all the companies you have named here, I am more interested in their stock prices drifting down.......so actually, sending that woman will be actually a blessing in disguise......!!!!!!
Amen, God Bless you Old Man!!!!
P.S-this time I am calling you Old Man to infuriate you enough to ask IDBI to send that fat ugly woman to all the companies mentioned there.....in the mean time, do me a favor to inform me about when the woman will be actually meeting the companies mentioned there, so that I can start trying my hand at shortselling IDBI.
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Posted By: vijinat
Date Posted: 27/Feb/2008 at 8:48am
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[/QUOTE]
For a moment, I got the shudder of my life.......but then I will be only happy if the fat ugly woman casts her spell on the stock prices. As I have always indicated, with all the companies you have named here, I am more interested in their stock prices drifting down.......so actually, sending that fat ugly woman will be actually a blessing in disguise......!!!!!!
Amen, God Bless you Old Man!!!!
P.S-this time I am calling you Old Man to infuriate you enough to ask IDBI to send that fat ugly woman to all the companies mentioned there.....in the mean time, do me a favor to inform me about when the fat ugly woman will be actually meeting the companies mentioned there, so that I can start trying my hand at shortselling IDBI. [/QUOTE]
After seeing the most uncharitable, unwarranted and personal attack on the physical personality of an analyst by Vivek Sukhani, I am eager to see his handsome face in TED. Will he publish it please?
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Posted By: Vivek Sukhani
Date Posted: 27/Feb/2008 at 9:17am
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permission denied......
However, will reply to your word by word adjective that you have used for my 'attack'......
uncharitable: I am not into the business of charity in any case, to be doing charitable things......
unwarranted: thats for a responsible authority to decide......
personal: Although it may be socially unacceptable to call a bafoon a bafoon, but legally its acceptable.
However, I agree that the last few posts have no relevance with the overall topic. And hence they may be expunged keeping in mind the sanctity of the topic. As such, I will be editing my post as I believe the sanctity of the topic shall be kept intact.
Regards and thanks for reminding Vijinat Sir.....
Lets continue discusiing the topic in a proper frame.
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Posted By: basant
Date Posted: 27/Feb/2008 at 10:44am
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Vivek please edit those posts!
------------- 'The Thoughtful Investor: A Journey to Financial Freedom Through Stock Market Investing' - A Book on Equity Investing especially for Indian Investors. Book your copy now: www.thethoughtfulinvestor.in |
Posted By: Vivek Sukhani
Date Posted: 28/Feb/2008 at 8:40pm
I edited them long time back.....I am unable to delete it. I think , keeping with the spirit of discussion, that post was definitely unwarranted, although I dont think attack is unwarranted. We will discuss the attack topic on the Pidilite's thread, if at all.
I will be glad if that post of mine is expunged.
Basant Sir, do we have a ban system, like the ICC does, three-match ban etc etc.....we can have 5 days ban, etc etc......to give this forum professional look, thats all..... And I will get the opportunity to set some records in being banned for the record number of days....!!!!
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Posted By: basant
Date Posted: 28/Feb/2008 at 9:47pm
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The point that we understod that the joke extended itself a wee bit further is akin to a ban. Let us get down to what we know best - analysing stocks!!!
------------- 'The Thoughtful Investor: A Journey to Financial Freedom Through Stock Market Investing' - A Book on Equity Investing especially for Indian Investors. Book your copy now: www.thethoughtfulinvestor.in |
Posted By: shivkumar
Date Posted: 01/May/2010 at 11:19am
| Just found this thread after I picked up Ken Fisher's Super Stocks recently. A check on mcap/sales ratio indicates that banks like Axis and Yes have a ratio of five or thereabouts. |