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Strategies & Market Trends : Fundamental Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Sergio H who wrote (2483)	10/31/2012 3:54:27 PM
From: bruwin	1 Recommendation Read Replies (1) \| Respond to of 4724

When I read that article by Paulo Santos I thought the Fisher that he was referring to was Ken Fisher. I remember Jurgis Bekepuris once referring to Ken Fisher and his enthusiasm for the P/Sales ratio. However, it turns out that Russ Fisher is not Ken Fisher, but nevertheless they both regard P/S as a relevant ratio. Now speaking for myself, I’ve never thought that P/S had much, if anything going for it. But that’s just my opinion and viewpoint. Others, or many, may disagree. I’ve never seen the relevance of comparing the Price of a company’s share to the top line of an Income Statement divided by the number of shares outstanding. The way I see it, any industrial type company starts off with Revenue, or Sales, coming into the business. What really matters is how much of that Gross Revenue is left over after it winds its way down the Income Statement. How much of it is “lost” due to various expenses and deductions that a company incurs. To go and divide a company’s current price by that top line Gross Revenue per share and then compare that P/S ratio to the P/S of other companies, just seems meaningless to me. It could happen, for example, that both Company ‘A’ and Company ‘B’ have very similar P/S ratios. But after the effects of CoS, SG&A, Interest Expense, Tax, etc.. etc.., have come into play, one may see that Company ‘A’ has a Bottom Line Profit, whereas Company ‘B’ may be showing a loss. I’d say that the tendency for shareholders to invest in ‘A’ would very likely be greater than to invest in ‘B’. Having said all that, I’m usually intrigued when someone takes a range of numbers, or data, and uses mathematics to find a trend or to draw conclusions from what those numbers, or that data, appears to convey. My guess is that Russ Fisher took the two sets of numbers, viz. (a) the Net Profit Margin % and (b) the Revenue Growth Rate %, and plotted them, graphically, against Price. I suspect he did this using EXCEL. When he did that for (a) it gave him a linear result. EXCEL then enables one to put a graphical equation to that line. In this case Y x 0.16, where “Y” = Net Profit Margin%. From that result he could see that one had a constant multiplier, i.e. 0.16. When he then did the same for (b) he got a far more complicated graphical curve, which certainly wasn’t linear. Once again, I suspect he then got EXCEL to give him the equation for that curve, which turned out to be ..... 0.00004X to the power of 3 – 0.0024X to the power of 2 + 0.0756X + 0.6322, where “X” = Revenue Growth Rate %. So all Russ Fisher asks one to do is to enter the two main variables X and Y, plus the TTM Revenue number and EXCEL does the rest with his two formulas. Well, ..... the proof of the pudding, as they say, is in the eating.