why is this a good measure for cyclical companies? The readings say that P/S ratio is useful for start-ups (no earnings), mature companies, and cyclical companies.
P/E and P/S would be bad because they are influenced by the cyclical nature of the industry. Probably P/BV, so long as it is not a service company.
When there are negative earnings possible, P/Es start to become difficult to compare. Sales is always positive. With a cyclical industry, you’d want normalized sales earnings, which can be hard to come up with if the company is young and hasn’t been through even one full business cycle. For start-ups, which are burning through cash and (usually) earnings negative, P/S is usually a better comparison metric. It doesn’t go negative like P/E and P/CF, and BV is probably changing rapidly. One of the most important metrics for startups is how fast they can grow (and get to the point where they can produce cheaper than they can sell), and that’s reflected in their sales numbers.
thanks bchadwick. I think that’s the answer.