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CFA Level 1
Equity Investments

Evaluating Equity Valuation through Price-to-Sales Ratio

Hard Equity Valuation Techniques Price Multiples

In the context of equity valuation, analysts commonly use price multiples to compare the valuation of different companies. One important multiple is the price-to-sales (P/S) ratio, which compares a company's stock price to its revenues per share. Understanding the nuances of price multiples is critical for evaluating the relative value of stocks, especially within the same industry.

Company A has a stock price of $50 and sales per share of $10, giving it a P/S ratio of 5. Company B has a stock price of $40 and sales per share of $8, resulting in a P/S ratio of 5 as well. Company C, however, has a stock price of $30 and sales per share of $6, leading to a P/S ratio of 5.2. If an investor is looking to invest in a company that offers the best value based on the P/S ratio, which of the following options represents the correct investment decision?

Hint

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