An analytical approach to comparing actual vs. fundamental “price-to-sales” and “enterprise value-to-sales” ratios on the European stock market

Abstract

This study is focused on the “price-to-sales ratio” (P/S) and the “enterprise value-to-sales ratio” (EV/S), which are used in relative valuation, in the analysis of companies’ performance, as well as in the analysis of different sectors and of the market. Special attention is paid to certain important requirements, related to the correct interpretation of market and sector averages of these ratios nowadays, including against the background of their historic levels. The identification, justification and use of the proper market ratios requires in-depth knowledge of their essence and of the fundamentals which drive their levels. In this connection, the logic of the fundamental “price-to-sales” (P/S) and the “enterprise value-to-sales” (EV/S) ratios is explained. These two fundamental ratios for the European stock market are calculated and compared with the actual P/S and EV/S. The results of the study indicate that the current levels of the actual P/S and EV/S of the European stock market are much higher than the levels suggested by fundamentals.