Good discussion on using P/S vs P/E for assessing value @Zboats & @Bushmanpat, I think both have their place depending on the type of investment and the type of investor as well as the year at which you determine that value.
The current P/E is reasonable for companies that are well into profitability and you expect to have relatively stable growth rates over the coming 3-5 years. The P/E in this case is a reasonable surrogate for a DCF result which embed discount rate and growth rates to current earnings. So for the types of companies @Bushmanpat likes, ie ones that have proven profitability and are more stable, the current P/E is a useful data point for a view on value.
Unprofitable (pre-profit) companies are often looked at from a P/S comparative point of view, taking into account sales growth rate expectations and gross margins for comparative value assessment. This suits high growth investors and situations where profit comparatives are useless, such as how @Zboats has employed. Current or forecasted P/S can be used effectively, the caveat I would flag is that once a company becomes profitable, investors start focusing on earnings based measures, so if you are forecasting out to a point the company is profitable and then valuing based on P/S it may not align to how the market views it.
I have bumbled around with value metrics and methods for about a decade now (still bumbling away) and the key learning I have had is that no one metric or approach is ever appropriate in all instances. I have also moved to favouring’s investments where companies are transitioning from loss to profit, noting that the market does a terrible job of valuing them and in small cap’s the number of eyes on them is less so finding large miss pricings is more likely.
My preferred metric/methods for valuation of these types of companies is either a DCF and/or a forecasted NPAT and P/E, 3-5 years away then discounted to today. So I am only looking at companies I expect to be solidly profitable in 3-5 years (allowing the use of P/E, and focusing on quality) and I am thinking about what the market may value them at that time rather than what I personally value them at. So I use a 10% discount rate or higher if I want additional margin of safety or to address greater uncertainty.
This is very much like @Strawman approach of spit balling future sales, NPAT% and P/E, then discounting. I tend to go into a bit more details by fleshing out the P&L forecast and doing an DCF in tandem (which helps in understanding the company economics), but fundamentally it’s the same logic. I want a ballpark value that the company may be worth in the future if a basic set of assumptions play out. Provided the assumptions are modest and value calculated is well above todays price then I probably have a good investment.
If the downside is limited/unlikely and upside extremely large then it’s an asymmetric bet. I just have to understand my key assumptions for success, test and monitor them as new information becomes available. This desired outcome is compatible with companies that are suited to P/S valuations where profitability is a lot further out, but I find this requires more foresight than I am capable of most of the time. Also it’s applicable to companies suited to current P/E for valuation, but I find that it is rare that an extremely large upside opportunity is missed on these companies, so it’s a less fruitful hunting ground.
So, horses for courses, I look forward to having a look at your update work @Zboats but probably won’t be until the weekend.
Cheers.