Price/Sales & 10 Year Predicted Returns

July 22, 2016

Earnings are again in focus as companies report their latest quarterly results.  Long-time readers know that I come from an accounting background & have been a critic of the reporting methods used by these companies.  Even more aggravating is the fact Wall Street is not only allowing it, but utilizing non-GAAP compliant earnings in their own valuation models.  This does not mean earnings do not matter, but it is more difficult to determine how healthy a company or the overall market really is.  Thankfully, there are a few numbers that are still useful as they are difficult to manipulate.  One of those numbers is Revenue or Sales.


Unfortunately for investors, the Revenue of the S&P 500 companies has not kept pace with the growth of the market, causing the Price / Sales ratio to reach extreme levels.  Even more unfortunate, the starting Price / Sales ratio is one of the best determinants of long-term (10 year) returns for investors – far better than the P/E ratio is in predicting returns. 


What does the current Price / Sales ratio tell us we should expect?  Look at the chart above & come up with your own conclusion.

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