Investment in stocks after the analysis of the valuation metrics is considered one of the best practices. When considering the valuation metrics, the price-to-earnings ratio has always been the obvious choice. 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 that are incurring losses or in an early cycle of development, 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 that 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. Therefore, 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.

Cirrus Logic CRUS, Barnes Group B, G-III Apparel Group, Ltd. GIII, JAKKS Pacific JAKK and UFP Industries UFPI are some companies with a low price-to-sales ratio and the potential to offer higher returns.

Screening Parameters

Price to Sales less than 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 Median Price to Earnings for its Industry: The lower, the better.

Price to Book (common Equity) less than 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 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: Zacks Rank #1 (Strong Buy) or 2 (Buy) 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 21 stocks that qualified the screening:

Cirrus Logic is a fabless semiconductor supplier, which develops, manufactures and markets analog, mixed-signal and audio DSP integrated circuits. Penetration in the Android market, and growth opportunities in digital headsets, MEMS microphones and voice biometrics are likely to be the key catalysts for the company.

Cirrus Logic has been benefiting from solid demand for high-performance mixed-signal content in smartphones. Growth opportunities in voice biometrics and closed-loop controllers are likely to be the key drivers in the long term. A sustained focus on expanding the product portfolio will help the company gain customers, thereby driving revenues. CRUS currently has a Value Score of B and a Zacks Rank #2. The company has an expected long-term earnings growth rate of 1.6%.

Barnes is a global diversified manufacturer and provider of highly engineered products, innovative solutions and differentiated industrial technologies. The company’s product and solution offerings include plastic injection molding technologies, robotic grippers, automation components, fine-blanked solutions, high-performance precision components and engineering solutions. Barnes is poised to benefit from its focus on innovation and solid operational execution.

Strength in the Aerospace unit due to healthy aftermarket businesses, including maintenance, repair and overhaul, and spare parts (RSP programs) sales, is benefitting the company. Robust Original Equipment Manufacturing order bodes well for the segment. The company’s measures to reward shareholders through dividends are encouraging. It has an expected long-term earnings growth rate of 10%. Barnes currently has a Value Score of B and a Zacks Rank #2.

G-III Apparel is a manufacturer, designer and distributor of apparel and accessories under licensed brands, owned brands and private label brands. The company’s portfolio includes outerwear, dresses, sportswear, swimwear, women’s suits and women’s performance wear, as well as women’s handbags, footwear, small leather goods, cold weather accessories and luggage.

This New York-based company has a portfolio of more than 30 licensed and proprietary brands, including five major global brands — DKNY, Donna Karan, Calvin Klein, Tommy Hilfiger and Karl Lagerfeld. G-III’s owned brands include Donna Karan, DKNY, Vilebrequin, G. H. Bass, Andrew Marc, Marc New York, Eliza J and Jessica Howard. GIII currently has a Value Score of A and sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

JAKKS Pacific is a multi-brand company that has been designing and marketing a broad range of toys and consumer products. It has been benefiting from strategic acquisitions, solid international footprint, focus on innovation and collaborations with popular brands and movie franchisees. JAKKS Pacific has emerged as a diversified consumer products company, buoyed by a string of acquisitions over the past several years.

The company realizes the importance of online retailing and shifted focus to aggressively boosting online sales. JAKKS Pacific has been committed to creating digital experiences for online shoppers, such as videos, 360-degree product images and enhanced web pages. It continues to modify its sales and logistics capabilities in order to capitalize on this continued shift to online. JAKK currently has a Zacks Rank #1 and a Value Score of A.

Grand Rapids, MI-based UFP Industries is a holding company with subsidiaries throughout North America, Europe, Asia and Australia. It supplies wood, wood composite and other products in the retail, industrial and construction markets. The company has been gaining from its presence in diversified markets, higher organic unit sales, solid contributions from buyouts, product innovation and an improved pricing model. UFP Industries’ industrial and construction segments are experiencing favorable growth trends and profitability, given normalized retail demand.

UFP Industries is poised to benefit from a solid U.S. residential market, and demand for repair and remodeling activities. Also, buyout gains and shareholders’ rewards are expected to work in its favor. The UFPI stock currently has a Value Score of A and a Zacks Rank #2.

UFP Industries, Inc. (UFPI): Free Stock Analysis Report

JAKKS Pacific, Inc. (JAKK): Free Stock Analysis Report

G-III Apparel Group, LTD. (GIII): Free Stock Analysis Report

Cirrus Logic, Inc. (CRUS): Free Stock Analysis Report

Barnes Group, Inc. (B): Free Stock Analysis Report

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