What Is Price/Revenue?

What Is Price/Revenue?

Price/Revenue, also known as Price/Sales, measures the market’s valuation of the company’s share for every dollar of sales made. It is computed as follows:

Price/Revenue in lieu of Price/Earnings (P/E)

Price/Revenue is usually applied in place of Price/Earnings (P/E) as a form of relative valuation comparison in the following industries or circumstances:

  • In highly cyclical industries with highly variable earnings.
  • In industries where the input costs and output prices are highly volatile, so is the sensitivity of profits to changes in revenue.
  • Where newly incorporated companies have insufficient earnings history to establish P/E.
  • Where companies incur large capital outlay at the outset resulting in net losses and hence negative P/E which is not a meaningful indicator in valuing the stock.

CNMC Goldmine Holdings Limited, incorporated in Singapore on 11 August 2011 as a private limited company and listed on Catalist of the Singapore Exchange as a public limited company on 28 October 2011, is a case in point. The Group is principally engaged in the business of exploration and mining of gold and the processing of mined ore into gold doré for subsequent sale. For its first 9 months ended 31 Sep 2011 results since listing, the Group incurred a net loss of US$1,366,306,000 while recorded revenue of US$3,685,674,000. Investors should be note that mining and processing of mineral deposits such as gold often requires a large capital investment at the outset and undergo long periods of development phases without economic realisation. Consequently, companies engaged in mining and processing of mineral deposits may take a longer period to breakeven and thus may not generate profits in its first years. To this end, the resultant negative P/E becomes irrelevant while the Price/Revenue ratio makes for an apt alternative in valuing the stock when viewed in context of the industry in which the company is operating.

How is Price/Revenue interpreted?

A falling share price or an increase in year-on-year revenue can bring about a lower Price/Revenue. Generally, stocks with low Price/Revenue that are trading at a depressed price below its fair value coupled with rising revenues not accompanied by rising trade receivables are favoured for its value potential and growth prospects in the longer term when compared to the company’s past performance or other comparable companies with similar capital structures.

As earnings can be subjected to accounting policies and management manipulation, many investors consider a company’s sales revenue as a more reliable component than its earnings in calculating a stock’s price multiple.

Pitfalls of Price/Revenue

Nevertheless, investors ought to be mindful of the ratio’s potential drawbacks. Sales revenue alone may not be a good indication of the profitability of the company as it does not take into consideration any operating expenses. Top-line sales revenue is of significance only if it can be translated into the company’s bottom-line earnings. Investors should thus look out for revenue growth with improving profit margins or profitability per sales dollar when examining the Price/Revenue ratio.

Where can I find the Price/Revenue ratio at ShareInvestor?

1. Price/Revenue ratios for the listed company over the years can be easily found under the Adjusted Fundamental Data section of the Financials and Factsheet.

Source: ShareInvestor.com

The stock is currently trading at a more attractive valuation relative to its revenue given its lower price multiple (Price/Revenue: 0.447x for Full Year Dec 2011) as compared to a year ago (Price/Revenue: 0.587 for Full Year Dec 2010) amidst gowing sales as reflected in improving year-on-year Revenue Growth.

2. Graphical representation of the Price/Revenue trend for the listed company over the years can be found under the Adjusted Fundamental Data section of the Financials and Factsheet.

Source: ShareInvestor.com

By clicking on thes ratios at the legend on the right, the Price/Revenue ratio alongside other ratios of the stock are illustrated using graphical representations for easy identification of trends over the years .

3. “Price/Revenue” table column layout under Prices and Portfolio.

Source: ShareInvestor.com

Source: ShareInvestor.com

There is a “Price/Revenue” column layout under Prices and Portfolio. By selecting this view, you will be able to see the Price/Revenue of a stock and compare it against other ratios using a variety of filters and selection.

In addition, if you would like to have your own customised columns in your portfolio, you can also add the Price/Revenue field into your selection.

 

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