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To: Dan3 who wrote (153364)1/2/2002 12:27:19 PM
From: Dave  Read Replies (3) of 186894
 
Dan,

While I was away on vacation, I had some time to read "Damodaran on Valuation: Security Analysis for Investment and Corporate Finance" by Aswath Damodaran. Dr. Damodaran is a highly regarded Associate Professor of Finance at NYU.

Anyways, while I was reading a chapter "P/S Ratios and Fundamentals", I started thinking about your debate.

On page 254, there is an excerp entitled "An Aside on Market Share" and goes on to say:

There are some firms that have focused on maximizing market share as their primary objective function. The linkage between increased market share and maket value is a tenuous one and can be examined using the profit margin to P/S [Price to Sales] ratio framework suggested in illustration 12.6. If increasing market share leads to higher margins, either because of economies of scale driving down costs or increased market power driving out competitors, it will lead to higher value. If the increase in the market share is accompanied by lower prices and profit margins, the net effect on value can be negative.

Basically, what Dr. Damodaran is stating is that a corporation should only chase revenues only when those revenues are profitable. Additionally, Dr. Damodaran suggests that the higher a corporations Net Profit Margins are, the higher Price to Sales ratio it will have.
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