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How to Value a Stock - Part II
By Ken Little

How do you put a value on a stock that has no earnings?

This second part of a series on valuing a stock will look at relating growth to stock price. This is especially important when looking at many of the newer high tech and Internet stocks.

Amazon.com has never earned a penny, yet the market somehow comes up with a way to put a price on its stock.

Amazon.com is a growth stock and when you invest in growth you are trying to make a decision about how the stock's growth and growth potential relate to the stock's price.

One of the tools you can use is the Forward PEG, which we discussed in Part I of this series.

Although a company may have no positive earnings, many do have sales and we can use sales as they relate to stock price as another measurement.

The sales-price ratio is a way to tie sales and the stock's price in a measurement that can then be used to evaluate how cheap or expensive the market is valuing the companies sales.

The sales-price ratio is calculated by taking the company's market capitalization plus any long-term debt and dividing that number by the last 12 months of sales.

Fortunately, like almost any number you want to find, the sales-price ratio is reported on any number of online services. For example, Amazon.com's sales-price ratio is 18.71, as reported on 01/20/00 by Morningstar.com.

The closer the sales-price ratio is to one the more fairly the market is valuing the company's sales. You can also use this number to compare companies whether they have earnings or not.

The sales-price ratio is another tool you can use to evaluate stocks. It does not tell the complete picture, but is one more piece of information that will help you make your decision.