Investing in stocks based on valuation metrics is considered a smart strategy. The price-to-earnings (P/E) ratio is often the go-to metric due to its simplicity and ease of use. However, the price-to-sales (P/S) ratio is more useful for evaluating stocks of companies that are unprofitable or in early growth stages, as it helps assess value when earnings are minimal or non-existent.

What is 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 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.

GIII Apparel Group GIII, Peabody Eerngy BTU, KB Home KBH, Pampa Energia S.A. PAM and Mid Penn Bancorp MPB 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 13 stocks that qualified after the screening:

G-III Apparel is a manufacturer, designer and distributor of apparel and accessories under licensed, owned and private-label brands. GIII has accelerated digital growth. It strives to become the best omnichannel organization, enhancing the DKNY and Karl Lagerfeld Paris e-commerce platforms, and partnering with Amazon and Fanatics. Digital and omnichannel growth is a key priority.

GIII’s commitment to brand building, effective marketing, cost management and market expansion provides a solid foundation for continued growth and profitability in fiscal 2025 and beyond. The company's strategic initiatives leverage design and merchandising strengths to drive profitable sales growth through innovative products and collections. GIII has a Value Score of A and currently sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

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 and Germany. The company operates through the Seaborne Thermal, Seaborne Metallurgical, Powder River Basin, Other U.S. Thermal, and Corporate and Other segments.

BTU supplies coal primarily to electricity generators, industrial facilities and steel manufacturers. It also engages in marketing and brokering coal from other producers; trading coal and freight-related contracts; and providing transportation-related services. BTU presently has a Value Score of A and a Zacks Rank #2.

Based in Los Angeles, CA, KB Home is a well-known homebuilder in the United States and one of the largest in the state. The company has been pursuing a return-focused growth plan designed to drive revenues and homebuilding operating income margin, return on invested capital, return on equity, and the leverage ratio. It is further benefiting from its intent of implementing the built-to-order model, reducing cycle times and offering various forms of mortgage concessions.

The company invests aggressively in land acquisition and development in high-end locations, which is critical for community count and top-line growth. This has eventually helped it reduce debt. KB Home remains optimistic that this blend of rising active inventory while reducing its annual interest incurred will boost the gross margin and returns. KBH currently has a Value Score of A and a Zacks Rank #2.

Pampa Energia is an independent energy-integrated company in Argentina. Through its subsidiaries, PAM is engaged in the generation, transmission and distribution of electricity in Argentina. The company operates through Electricity Generation, Oil and Gas, Petrochemicals, and Holding and Other Business segments. It generates electricity through thermal generation plants, thermal gas-fired generation plants and hydroelectric power generation systems, as well as a wind farm.

The company also explores for and produces oil and gas, and operates a high-voltage electricity transmission network. It produces petrochemicals, such as styrene, styrene-butadiene rubber and polystyrene. The company engages in gas transportation and advisory services activities. PAM currently flaunts a Zacks Rank #1 and a Value Score of A.

Based in Harrisburg, PA, Mid Penn is the holding company for Mid Penn Bank, offering commercial banking services to individuals, partnerships, non-profits and corporations. Operating mainly in the U.S. financial sector, MPB provides a variety of financial products, including mortgages, home equity loans, consumer loans, lines of credit and deposit services. The company’s has demonstrated resilience through operational efficiency and execution in a challenging banking landscape, which positions it for continued growth despite economic headwinds.

However, Mid Penn has encountered challenges, such as an inverted yield curve and increasing funding costs. Moving forward, the company will prioritize controlled growth and cost management to navigate ongoing economic pressures effectively. MPB has a Value Score of B and currently flaunts a Zacks Rank #1.

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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.