Price-to-Sales: The Overlooked Ratio

"The price-to-earnings ratio is the most widely followed and most widely misunderstood metric in investing. Price-to-sales cuts through the noise." — Ken Fisher

Ken Fisher helped popularise the price-to-sales ratio in the 1980s, when it was little used. His reasoning: earnings can be temporarily depressed or shaped by accounting choices, but revenue is harder to distort.

Price-to-sales can reveal value hidden in:

1. Cyclical companies at the bottom of their earnings cycle, when profits look terrible but sales are intact.
2. Turnarounds, where margins are temporarily squeezed.
3. Early-stage profitable businesses, where the price-to-earnings ratio looks high but price-to-sales looks reasonable.

The framework: a company with a credible path to better margins, trading at a fraction of its sales, can be cheaper than a mature peer on a high multiple of earnings. Sales are the raw material; margins are the lever that turns them into profit. The ratio is a starting point for investigation, not a verdict on its own.

Illustrative example: a carmaker at the trough

At a moment of deep pessimism after a downturn, a major carmaker traded well below one times its sales while still generating positive cash flow and restructuring. Screens based on earnings missed it; a price-to-sales screen did not. The ratio pointed to where to look — the rest was analysis.