Price-to-Sale Ratio

Investment analysts and financial economists use various fundamental indicators to gauge the value of publicly traded equities.  The calculation of these indicators is pretty straight forward:  current stock prices are simply divided by the fundamental factor under consideration.   The most widely recognized valuation indicators include the Price-to-Earnings or P/E ratio, Price-to-Book Value ratio, Enterprise Value-to-EBITDA, and Price-to-Sales ratio.  

The last ratio mentioned above, Price-to-Sales (P/S), is what intrigues me the most at the present time.  As an equity analyst, the obvious advantage of using the P/S ratio is that it can be applied to stocks with negative earnings and cash flow which is frequently the case with younger, faster growing companies.  Furthermore, sales are the least manipulated valuation indicator (granted, sales can be subject to aggressive revenue recognition, channel stuffing, etc).  Earnings and book value are notoriously subject to manipulation and accounting shenanigans, but at the end of the day, a sale is a sale.  

No single valuation indicator should be used in isolation, but if we look at the current P/S ratio on the S & P 500 all the bells and whistles should be going off.   In fact, the P/S ratio has just surpassed the peak of the Dot.com era;  the S & P 500 would subsequently go on to lose 45% in value, and the NASDAQ would fall approximately 80% in value before bottoming out in late 2002.  

Stock bulls would argue that “this time is different” and that an elevated P/S ratio is in fact justified and can be sustained for years to come.   

What are your thoughts?   Is the S & P 500 P/S ratio pointing towards a bubble in equity prices or is “this time different” ?  

If you would like to track the S & P 500 P/S ratio through time on a quarterly basis, visit www.multpl.com.  It is a great site with information on dozens of valuation metrics.  

This guest post was written by Thomas McDevitt, CFA, CFP, EA.  All opinions are his own. The above references an opinion and is for educational purposes only.  It is not intended to be investment advice.  Seek a duly licensed professional for investment advice prior to making investment decisions.

 

GDP

Gross Domestic Product or GDP is an economic indicator that is compiled and released by the U.S. Bureau of Economic Analysis.  Calculating GDP is no small task, as it attempts to calculate the total market value of all goods and services produced over some finite period (quarterly and yearly).   

The following accounting identity summarizes the components of GDP:

GDP =  C  +  G  +  I  + NX
where:
C   =  Consumer Spending
G   =  Government Expenditures
I     =  Net Investment 
NX =  Net Exports (or Exports – Imports)

GDP is important because it is the ultimate score card for an economy.   If growth is too slow or negative, the government may implement fiscal and monetary policies to help stimulate the economy (cut taxes, increase government spending, lower interest rates, etc.).   If growth is too fast, and inflation starts to up-tick, the Federal Reserve can conduct open market operations to raise interest rates in at attempt to choke off liquidity and slow things down.  

GDP is what is known as a lagging indicator.  Although it does a good job at telling us where the economy has been, it tells us very little about the current situation.  With that in mind, the Atlanta branch of the Federal Reserve has developed a “nowcast” of GDP called “GDPNow”, which attempts to provide a timely estimate of GDP for the upcoming quarter.   Each week, the Atlanta Fed adjusts their forecast as data becomes available (the model improves in accuracy as it approaches the end of the quarter).  

For the period ending April 17th, 2018, GDPNow is “nowcasting” first quarter GDP growth of just 2%.   You can see in the chart below that GDPNow estimates have steadily fallen since early February when the model peaked at 5% + growth.   Although first quarter GDP has been noticeably weak in recent years, some fear that Trump’s economic policies may not have as much “punch” as previously thought.   

This guest post was written by Thomas McDevitt, CFA, CFP, EA.  All opinions are his own. The above references an opinion and is for educational purposes only.  It is not intended to be investment advice.  Seek a duly licensed professional for investment advice prior to making investment decisions.

Accountant-Lawyer Alliance (ALA) Announces Launch of Association

March 11th, 2018: The Accountant-Lawyer Alliance (ALA) is excited to announce the re-launch of its membership association platform. A membership in the ALA will provide unlimited live webinars, which include CPE & CLE Credits, a Speakers Bureau, practice development resources and much more. “We are unaware of any member association that includes unlimited live webinar CPE & CLE credits as part of membership, but that is only a small portion of the value we bring our members. We have many exciting things planned for the community beyond this. This is just the beginning,” said Dennis McGovern, COO of the Accountant Lawyer Alliance.

There will be three levels of membership:

Student: for college students to get engaged in additional learning, networking, and test preparation

Professional: for the accounting or legal professionals who don’t have mandatory continuing education requirements

CPA–Attorney: for the CPA/Attorney audience, which requires CPE and CLE

For a full list of member benefit visit: https://alacommunity.org/member-benefits/

About the Accountant Lawyer Alliance (ALA):

The Accountant-Lawyer Alliance (ALA) community exists to facilitate collaboration between accountants and legal professionals so that they can enhance their businesses and add to the quality of service received by the public and their business clients. We want to be the main resource for accounting and legal professionals to connect, learn, and grow their practices.  This means that we need to approach networking like the chamber of commerce; we need to approach education like universities; and we need to embrace technology like the most innovative firms.  All the while, we will strive to be the organization that truly minimizes bureaucracy and maximizes member value.

The Accountant-Lawyer Alliance (ALA) Supports McGovern’s Disney Run

March 10th, 2018: The Accountant-Lawyer Alliance (ALA) is happy to announce that as part of its 2018 charitable giving and support initiatives, it has donated $200 to Dennis McGovern’s charity of choice. “One of our member benefits is giving our stakeholders a choice in who we support. In this case, our COO, Dennis McGovern, represented the ALA in the annual Disney run. We provided a gift for each mile that Dennis completed. We then gave the Dennis the power to direct those funds and Dennis selected the Children’s Miracle Network. We thank Dennis for all the hard work and are happy to provide support for this valuable program”, said CEO William Kline.

If you are a member of the ALA, and would like us to consider supporting your charity or event, please contact us at admin@alacommunity.org.

About the Accountant-Lawyer Alliance (ALA):

The Accountant-Lawyer Alliance (ALA) community exists to facilitate collaboration between accountants and legal professionals so that they can enhance their businesses and add to the quality of service received by the public and their business clients. We want to be the main resource for accounting and legal professionals to connect, learn, and grow their practices.  This means that we need to approach networking like the chamber of commerce; we need to approach education like universities; and we need to embrace technology like the most innovative firms.  All the while, we will strive to be the organization that truly minimizes bureaucracy and maximizes member value.

Accountant-Lawyer Alliance (ALA) Designates New Management Team

March 8th, 2018: We are excited to announce that ALA founder, Peter Roland, CPA, has transferred ownership of the Accountant-Lawyer Alliance (ALA) to William (Bill) Kline, Ph.D., CFA and Dennis McGovern. Mr. Kline has extensive experience in consulting and training, while Mr. McGovern has extensive experience in entrepreneurship and software system implementation and design. Together, their skills bode well for an organization with a vision focused on collaboration, innovation, and education.

With a new management team at the helm, the ALA will have a renewed focus on the development of the ALA membership association. The relaunch of the ALA membership association brings a plethora of new benefits beyond those already enjoyed by the ALAs LinkedIn community, which consists of 125,000 professionals worldwide. “Peter did the hard work. Drawing on 30+ years of experience as an accountant and entrepreneur, he identified a limitation in many accounting and legal practices: a lack of collaboration amongst accounting and legal professionals.  Now it is up to Dennis and I to build a team that delivers an even stronger value proposition for accounting and legal professionals and the broader community. It is an exciting opportunity”, said Bill Kline.

In the coming months, the ALA will be rolling out a host of free member benefits such as unlimited live CPE/CLE webinars, networking events, on-demand resources, and a speaker bureau, to name a few. Continue to join/follow our LinkedIn Groups to learn about our latest offerings:  https://alacommunity.org/linkedin-discussions/  

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About the Accountant-Lawyer Alliance (ALA):

The Accountant-Lawyer Alliance (ALA) community exists to facilitate collaboration between accountants and legal professionals so that they can enhance their businesses and add to the quality of service received by the public and their business clients. We want to be the main resource for accounting and legal professionals to connect, learn, and grow their practices.  This means that we need to approach networking like the chamber of commerce; we need to approach education like universities; and we need to embrace technology like the most innovative firms.  All the while, we will strive to be the organization that truly minimizes bureaucracy and maximizes member value.