Who popularized the Price-to-Sales Screen?
The price-to-sales ratio was popularized by Kenneth Fisher in his 1984 book Super Stocks. Fisher — founder of Fisher Investments and, for more than three decades, a Forbes columnist — argued that sales are the most stable line on the income statement and therefore a sturdier base for valuation than earnings. The Price-to-Sales Screen built on his insight divides a company's market value by its revenue (equivalently, price per share by sales per share over the last twelve months) and looks for stocks trading cheaply on that measure. Later research reinforced Fisher's case, finding that low price-to-sales ratios could identify undervalued stocks at least as well as low price-to-book or low price-earnings ratios.
The core idea
Every valuation ratio divides price by some measure of business value — earnings, book value, cash flow, sales. Sales sit at the top of the income statement, before the long chain of assumptions that shapes reported profit: depreciation schedules, inventory methods, reserves, one-time charges. That makes revenue both more stable and more comparable across companies than earnings. The practical payoff shows up when profits vanish. A company rolling out a costly new product, or caught in a cyclical trough, can post negative earnings that render the P/E ratio meaningless — a P/E needs positive earnings even to exist. Sales rarely go negative. The price-to-sales ratio keeps working precisely when earnings-based valuation breaks down, which is often the moment a beaten-down stock is most interesting. A low ratio flags a company the market may be pricing for failure while its revenue base stays intact.
What the Price-to-Sales Screen looks for
- Excludes stocks traded over the counter (OTC).
- Excludes the Financial sector and the Real Estate Operations industry, where sales are not the main driver of value.
- Current price-to-sales ratio below the company's own average price-to-sales ratio over the last five years.
- Price-to-sales ratio below the median for the company's industry.
- Five-year compound annual sales growth above the industry median — cheap, but still growing faster than its peers.
- Total liabilities to assets below the industry median as of the latest fiscal quarter (Q1), a leverage check that screens out fragile balance sheets.
- 52-week relative price strength above the industry median, a sign the market may be starting to notice.
- Market capitalization of at least $50 million as of the latest fiscal quarter (Q1).
Why the Price-to-Sales Screen can work
The screen is deliberately more than a low-ratio filter, because a bare low-PSR screen is easy to game and usually turns up the wrong stocks. Two tests separate a bargain from a value trap. First, growth: a cheap price-to-sales ratio only signals opportunity if the business is actually expanding, so the screen demands sales growth above the industry median — the profile of a growing company that has stumbled or been overlooked, not one in terminal decline. Second, relative strength: value stocks can stay cheap for years, so requiring price strength above the industry median tilts toward names the market is already beginning to re-rate. The leverage cap guards the downside, filtering out the over-indebted firms a value screen tends to dredge up. Fisher's original claim — that revenue-based valuation catches undervalued companies earlier than earnings-based valuation — rests on sales reacting less violently than profits to temporary trouble.
What to keep in mind
The price-to-sales ratio has one blind spot that dwarfs the others: it ignores profitability entirely. A dollar of sales at a supermarket earning two-cent margins is worth far less than a dollar of sales at a software firm earning thirty, yet a naive PSR screen treats them alike — which is why low-margin industries such as grocers and steelmakers dominate any unfiltered low-PSR list. Sales you cannot convert into profit are not worth much. That is why the ratio has to be paired with quality checks. This screen leans on its industry-median comparisons and its sales-growth and leverage tests to do some of that work, but the burden still falls on you to confirm the company can eventually turn revenue into earnings. Judge the ratio inside its industry, never across the whole market, and always ask what margin the sales carry.
Sources
Super Stocks, Kenneth L. Fisher, Dow Jones-Irwin, 1984.
American Association of Individual Investors (AAII) — Stock Investor Pro screen definition and commentary.