Of those three ratios, IMO, only P/E has some relevance in terms of company valuation.
Why P/Bk ?? What relevance is there when the current price of a share is lower or higher than its Balance Sheet Book Value per share ? That Book Value per share only becomes relevant when a company is liquidated and a shareholder, at the time of liquidation, hopefully, gets more per share at payout time than the price he originally paid for that share.
For those shareholders who buy and sell a stock, during the life of that stock, the price of that stock relative to the Book Value per share of that stock had nothing to do with what the shareholder paid for the shares and what he received when he sold the shares.
I reckon very few shareholders who buy shares in a company hold those shares until that company is liquidated.
Why P/S ?? Any company that reports its results in the format of Top line Revenue, CoS, SG&A, etc.., etc.., shows an amount of Gross Revenue it received at the top of its Income Statement. So now one divides that number by the shares issued and one gets Sales per share. So what ?? What is the relevance of that number when one compares it to the current price of the company's shares ?
It tells one nothing about all the associated costs that the company incurred AFTER it obtained that initial injection of Sales Revenue. It's only AFTER one works one's way down the Income Statement that one gets an insight into how much of that Sales Revenue is left over to be transferred to its Balance Sheet and, hopefully, a portion paid out to shareholders.
I've seen cases where two companies had very similar P/S ratios. However, one company reported several Annual Bottom Line losses whereas the other company reported decent positive Net Incomes.
On the "Buffettology" board I recently posted a reference to "Warren Buffett and the Interpretation of Financial Statements". That book digs very deeply into ALL the criteria that the most successful investor, ever, looks for in a company's financial statements.
To the best of my knowledge there is no reference there to a Price/Book or a Price/Sales ratio. There is, however, reference to the Price/Earnings ratio.
What Mr. Buffett has always done is to take certain items from within a company's three financial statements, turned them into ratios and put target percentages to those ratios. More often than not, any company that can simultaneously meet or exceed those ratios is doing very nicely thankyou.
I don't know about others, but I'm inclined to follow the lead of Mr.Buffett ...
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