A Valuation Ratio Explained Simply
from Nanalyze Hosted by Nanalyze
Stay informed with our free disruptive technology investing newsletter, Nanalyze Weekly. Sign up now at https://www.nanalyze.com/nanalyze-weekly/. This episode is pulled from a YouTube presentation. View the original presentation at https://youtu.be/c_cMdOTMbD4. A valuation ratio needs to be simple and intuitive. The most popular valuation ratio, price to earnings ratio or PE ratio, doesn't work so well when a stock doesn't have positive earnings. Price to book ratio or PB ratio isn't particularly useful, while price to cash flow works if you have positive cash flows. For disruptive growth stocks that aren't yet possible, price to sales ratio or PS ratio works best. Sales or revenues are a proxy for market share captured, and the PS ratio helps determine how much you're paying for the growth. We've taken the PS ratio a step further and evolved it into our simple valuation ratio which is calculated using market cap / annualized revenues. We provide some examples of our simple valuation ratio applied to high-growth stocks and discuss some new rules we've put in place to make sure we're not overpaying for growth.
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