Median P/S Value = Total Annual Sales / Shares Outstanding * 10YearMedianPS Ratio.
This valuation method assumes that the stock valuation will revert to its historical mean in terms of Price/Sales Ratio. The reason we use Price/Sales Ratio instead of Price/Earnings Ratio or Price/Book Ratio is because Price/Sales Ratio is independent of profit margin, and can be applied to a broader range of situations.
It also assumes that over time the profit margin is constant. If a company increases its profit margin to a sustainable level, this value might under-estimate its value. If it has permanent declined profit margins, this may over-estimate the companys value.
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