ADVFN Guide A Beginner’s Guide to Value Investing : [PDF Download]

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“Price rocketed and in the end ‘private equity’ gobbled the company up. If a business can sell a lot of its products, it is likely to be well run. While all sorts of things can go wrong with a company, the more a company sells as a ratio to its market cap the more likely it is to be cheap.

An average company is valued at £1 of market cap to £1 of sales. That is a good benchmark. Some companies are worth ten times sales, some are worth 0.1 times sales; the difference of course between those two companies is that one company’s sales are worth a hundred times more than another’s.

It is clearly odd that a pound of sales of one company can be worth a hundred times more than another and this is the basis of why we look at this number. It might not be odd, it might just be wrong. The values we are looking for are companies with a sales to market capitalisation ratio of less than 1.

This means a company’s sales total more than the company can be bought for. To start with we can cut out any company that is worth more than half its sales, or has a ratio greater than 0.5. We don’t need to be gentle; there are plenty of companies that will survive this guillotine.

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