Investing in stocks, after analyzing the valuation metrics, is considered one of the best practices. The price-to-earnings ratio has always been the obvious choice when considering the valuation metrics. This is because calculations based on earnings are easy and come in handy. However, the price-to-sales ratio is convenient for determining the value of stocks incurring losses or in an early development cycle, generating meager or no profit.

What’s the Price-to-Sales Ratio?

While a loss-making company with a negative price-to-earnings ratio falls out of investor favor, its price-to-sales can indicate the hidden strength of the business. This underrated ratio is also used to identify a recovery situation or ensure a company's growth is not overvalued.

A stock’s price-to-sales ratio reflects how much investors pay for each dollar of revenue generated by a company.

If the price-to-sales ratio is 1, investors are paying $1 for every $1 of revenues generated by the company. A stock with a price-to-sales below 1 is a good bargain as investors need to pay less than a dollar for a dollar’s worth.  

Thus, a stock with a lower price-to-sales ratio is a more suitable investment than a stock with a high price-to-sales ratio.

The price-to-sales ratio is often preferred over price-to-earnings, as companies can manipulate their earnings using various accounting measures. However, sales are harder to manipulate and are relatively reliable.

However, one should keep in mind that a company with a high debt and a low price-to-sales ratio is not an ideal choice. The high debt level will have to be paid off at some point, leading to further share issuance, a rise in market cap, and, ultimately, a higher price-to-sales ratio.

In any case, the price-to-sales ratio used in isolation cannot do the trick. One should analyze other ratios like Price/Earnings, Price/Book and Debt/Equity before arriving at any investment decision.

Peabody Energy BTU, PriceSmart PSMT, Pfizer PFE, Barrett Business Services BBSI and The Greenbrier Companies, Inc. GBX are some companies with a low price-to-sales ratio and the potential to offer higher returns.

Screening Parameters

Price to Sales less than the Median Price to Sales for its Industry: The lower the price-to-sales ratio, the better.

Price to Earnings using F(1) estimate less than the Median Price to Earnings for its Industry: The lower, the better.

Price to Book (common Equity) less than the Median Price to Book for its Industry: This is another parameter to ensure the value feature of a stock.

Debt to Equity (Most Recent) less than the Median Debt to Equity for its Industry: A company with less debt should have a stable price-to-sales ratio.

Current Price greater than or equal to $5: The stocks must be trading at a minimum of $5 or higher.

Zacks Rank less than or equal to #2 (Buy): Zacks Rank #1 (Strong Buy) or 2 stocks are known to outperform, irrespective of the market environment.

Value Score less than or equal to B: Our research shows that stocks with a Value Score of A or B, when combined with a Zacks Rank #1 or 2, offer the best opportunities in the value investing space.

Here are five of the 16 stocks that qualified after the screening:

Peabody Energy is engaged in the coal mining business in the United States, Japan, Taiwan, Australia, India, Brazil, Belgium, Chile, France, Indonesia, China, Vietnam, South Korea, Germany and internationally. The company operates through the Seaborne Thermal, Seaborne Metallurgical, Powder River Basin, Other U.S. Thermal, and Corporate and Other segments.

The company supplies coal primarily to electricity generators, industrial facilities and steel manufacturers. It also engages in marketing and brokering of coal from other coal producers; trading coal and freight-related contracts; and providing transportation-related services. BTU has a Value Score of A and presently flaunts a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

PriceSmart operates U.S.-style membership shopping warehouse clubs in the United States, Central America, the Caribbean and Colombia. It also operates an e-commerce platform for online ordering, curbside pickup and delivery services. PriceSmart is a highly respected and valued brand in all markets where it operates. PSMT is focused on improving sales, operating efficiencies and using technology to enhance its business performance.

Providing omnichannel shopping options for its members, including sales through its app and desktop website, is one of the company’s growth drivers. Additionally, its private label membership selection brand continues to be a significant area of focus based on the good value it brings to members. PSMT currently has a Value Score of A and a Zacks Rank #2.

Based in New York, Pfizer markets a wide range of drugs and vaccines. The company’s Biopharma reporting segment includes three broad therapeutic areas — Primary Care, Specialty Care and Oncology. Pfizer has committed significant resources toward the development of treatments in the fields of oncology, internal medicine, rare diseases, immunology, inflammation, vaccines and hospitals.

Pfizer expects better non-COVID operational revenue growth in the future quarters, driven by its products like Vyndaqel and Prevnar; new launches like Abrysvo, Velsipity and Penbraya; and newly acquired products, including those acquired from Seagen. Huge profits from its COVID products strengthened its cash position. PFE currently has a Value Score of B and a Zacks Rank #2.

Barrett provides business management solutions for small and mid-sized companies in the United States. The company has developed a management platform that integrates a knowledge-based approach from the management consulting industry with tools from the human resource outsourcing industry.

BBSI has been gaining from an expanding client base and the ongoing rollout of BBSI Benefits. Additionally, Barrett has been witnessing positive results in its pricing and cost-management strategies, leading to strong, sustainable earnings growth. BBSI currently has a Value Score of A and a Zacks Rank #2.

Greenbrier is a leading international supplier of equipment and services to global freight transportation markets. The company’s broad product lineup, extensive market relationships, supportive customer experience and deep commercial origination capabilities create a unique leadership position and enable ongoing success. These factors provide revenue visibility, while supporting its profitable leasing business, which is growing through disciplined investments in leased railcar fleet and robust lease renewals.

The company is progressing well on its strategic goals. Management expects a sustained financial performance amid healthy market demand. GBX currently has a Value Score of A and a Zacks Rank #2.

You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and test them first before taking the investment plunge.

The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your trial to the Research Wizard today. And the next time you read an economic report, open up the Research Wizard, plug your finds in and see what gems come out.

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Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.

Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance.

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Pfizer Inc. (PFE) : Free Stock Analysis Report

Peabody Energy Corporation (BTU) : Free Stock Analysis Report

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Greenbrier Companies, Inc. (The) (GBX) : Free Stock Analysis Report

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