Andiamo Corp. (ANDI)

[Brando1975]

If they get anywhere near 100 million we will be in for a run like never witnessed before in history imo!!

How to Value Stocks: Revenue-Based ValuationsThe handy price-to-sales ratio.

Motley Fool Staff

(motley-fool-staff)

May 27, 2008 at 12:00AM

Every time a company sells a customer something, it produces revenue. Revenue is the income generated by a company for peddling goods or services.

Whether or not a company has made money in the previous year, there is always revenue -- even companies that may be losing money temporarily and have earnings depressed due to short-term circumstances, such as product development or higher taxes. Companies that are relatively new in a high-growth industry are often valued off of their revenue and not their earnings. Revenue-based valuations are assessed using the price/sales ratio, or PSR.

The price/sales ratio takes the current market capitalization of a company and divides it by the past 12 months trailing revenue. 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 10 million shares outstanding priced at $10 a share, then the market capitalization is $100 million.

Some investors are even more conservative and add the current long-term debt of the company to the total current market value of its stock to get the market capitalization. The logic here is that if you were to acquire the company, you would acquire its debt as well, effectively paying that much more. This avoids comparing PSRs between two companies when one has taken out enormous debt to use to boost sales, and the other has lower sales but no additional nasty debt.

            Market Capitalization = (Shares Outstanding x Current Share Price) + Current Long-term Debt 

The next step in calculating the PSR is to add the revenue from the last four quarters and divide this number into the market capitalization. If XYZ Corp. had $200 million in sales over the past four quarters and currently has no long-term debt, the PSR would be:

10 million shares x $10/share + $0 debt) / $200 million in revenue = 0.5 PSR