There’s a case to made that technology stocks and the greater use of technology in all business operations renders the price-to-sales ratio less relevant because margins tend to expand.
But that’s not happening. Margins have either stalled or are falling, and that was even before the coronavirus pandemic hit the economy.
Corporate debt expansion may also be a caveat when using price-to-sales as a tool to understand equity value. Borrowing money to plow into research and development or expand sales may yield future results. But enterprise value-to sales is also at a record.
There’s nothing inherently wrong with paying more for every dollar of sales while margins slip away. It may just not be profitable.
But that’s not happening. Margins have either stalled or are falling, and that was even before the coronavirus pandemic hit the economy.
Corporate debt expansion may also be a caveat when using price-to-sales as a tool to understand equity value. Borrowing money to plow into research and development or expand sales may yield future results. But enterprise value-to sales is also at a record.
There’s nothing inherently wrong with paying more for every dollar of sales while margins slip away. It may just not be profitable.