P/s ratio cost structures

CFA Level II
#1

I read that price/sales ratios dont consider differences in cost structures and debt structures. I understand the debt structures part but what does cost structures actually mean?

#2

It doesn’t distinguish between a company with $100 in sales and $10 in net income, and a company with $100 in sales and $1 in net income, each having a share price of $50.

1 Like
#3

thank you Bill.

#4

You’re welcome.

#5

Theoretically, a high sales, low margin stock should have a smaller P/S ratio versus a low sales, high margin company, correct?

#6

Yup.

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#7

This is why relative valuation uses several indicators, not just one. In case one shows high discrepancy, the others will bring light.