What Works on Wall Street (O'Shaugnessy) Message Board

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Strategies & Market Trends : What Works on Wall Street (O'Shaugnessy)

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To: Scott Mc who wrote (37)	3/4/1997 11:28:00 PM
From: sea_biscuit	of 109

Hi Scott : I remember reading somewhere about another metric -- I think it is called the "enterprise value". Basically, it says that the fair price-sales ratio for a stock is 20 * profit-margin (where profit-margin is expressed as a fraction between 0.0 and 1.0. So, in the case of Microsoft, it should be 20 * 0.3 (for 30% profit margins), or 6.0. But if I remember right, Microsoft right now sells at 11.0 times sales! And according to this formula, one should NEVER pay more than 20 times sales for ANY stock (because the theoretical limit for profit-margins is, of course, 100% or 1.0). And yet, we see many "momentum investors" (say, is this a PC term for "speculators"? :-)) pay 100, 200 or even a few THOUSAND times sales for some stocks! Dipy.

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