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Thursday, September 28, 2006 9:43:22 AM
The price/sales ratio takes the current market capitalization of a company and divides it by the last 12 months trailing revenues. The market capitalization is the current market value of a company, arrived at by multiplying the current share price times the shares outstanding. This is the current price at which the market is valuing the company. For instance, if our example company XYZ Corp. has ten million shares outstanding, priced at $10 a share, then the market capitalization is $100 million.
As with the PEG and the YPEG, the lower the PSR, the better. Ken Fisher, who is most famous for using the PSR to value stocks, looks for companies with PSRs below 1.0 in order to find value stocks that the market might currently be overlooking. This is the most common application of the PSR and is actually a pretty good indicator of value, according to the work that James O'Shaughnessey has done with S&P's CompuStat database.
So using current data and only two hit CD's (or 2M copies sold for all artists in one year) looking one year forward you get the following
Outstanding shares * Share price
-------------------------------- = PSR
Revenues (4 qtrs)
(1.7B * .001) / 20M (min 1 yr revs) = .085
*************************************************************
That puts the share price at about .012
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