Value investing

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11. Ratio of market capitalisation to sales

A further tool for value investors is to look at the relationship between a company's market capitalisation and its sales.

This is particularly useful when looking at companies which have fallen on hard times.

Example Cables Group BICC

A low ratio of market cap to sales is exciting.

Why?

Because if the pre-tax profit margin is increased by just 1%, then the group's profits will rise by £41m - not bad for a company valued at under £200m.

However, just because a company has a low PSR (price to sales ratio) it does not necessarily make it an attractive investment.

For example, the company may operate in very low margin industries such as contracting or construction or it may be encumbered with the large levels of debt.

Example Coats Viyella

Another similar example from 1999 is Coats Viyella, on the face of it a relatively unexciting engineering and textile group. With a share price of just 27p in early 1999, the group was valued at £190m, and with turnover the previous year of £2.4bn this gave a PSR of 0.08. The shares doubled in the course of 1999.

1. What is value investing? 2. Ben Graham 3. Does value investing suit you? 4. Back in fashion 5. Undervalued assets - introduction 6. Undervalued assets - property companies 7. Debt 8. Earnings 9. Earnings - an example 10. Dividends 11. Ratio of market capitalisation to sales 12. Warren Buffett's principles 13. Why do stocks become undervalued/overvalued? 14. Conclusion

• Value Growth Investing