Originally Posted by
turmeric
Yup agreed, and the context of why the ratio is so high aside, there is a big danger when with working with ratios where the numerator relative to the denominator is tiny (or visa versa) as relatively small absolute changes in the denominator (in this case) can have massive effects.
That is highlighted by the numbers that have been thrown around this morning.
Whipmoney's initial and current Price-to-Sales ratio is at 25,000+ compared to:
916x if sales are $500k (a 96.3% decline in the ratio from it's current value)
458x if sales are $1m (a 98.3% decline in the ratio from it's current value)
91.6x if sales are $5m which as baller points out only requires roughly 10,000 tests which is an underestimate based on Darlings comments (a 99.6% decline in the ratio from it's current value).
If you flip those percentages in all likelihood the current Price-to-Sales ratio is arguably well over 27,200% greater than what we would expect it to be later this year.
My point is you can get these massive swings in the value of the ratio over time when either the numerator or denominator is coming off a very small base relative to it's counterpart (check out the recently reported % changes in NZ drowning's last year compared to this year, or the serious patient safety events reported by the Health Quality and Safety Commission for our NZ hospitals for some good examples).
Therefore I'm not sure the Price-to-Sales ratio is much good of a metric in determining whether the SP is over valued or not (worth considering though of course). As Balance points out it PEB is about upside potential right now. Valuation should be based more on that than the current Price-to-Sales ratio IMHO.