To improve transparency in the stock market, the Securities and Exchange Organization said henceforth investors will have access to the price-to-sales ratio (P/S) via the market’s bulletin board.
The P/S ratio is one of the critical analytical and valuation tools for investors. “Information will be provided to help investors determine the value of stocks,” Vahid Roshan-Qalb, the SEO deputy chief for supervising stock issuers, was quoted as saying by SEO News Agency.
P/S can be calculated either by dividing the company’s market capitalization by its total sales over a designated period (usually 12 months) or on a per-share basis by dividing the stock price by sales per share. The P/S ratio is also known as a sales multiple or revenue multiple.
A low ratio may imply the stock as undervalued, while a ratio that is higher-than-average could indicate that the stock is overvalued.
Roshan-Qalb said the ratio is calculated for manufacturing listed companies and it is not normal for non-manufacturing companies to present P/S ratio.
“The ratio will be updated with change(s) in share price and when companies release their monthly financial report.”
One of the drawbacks of the P/S ratio is that it doesn’t show whether or not a company is making profit. In other words, it is not necessarily used to give investors insight into the profitability of stocks in the future to be able to make informed choices.
To overcome this drawback, the stock market regulator plans to require listed companies to publish their earnings per share (EPS) on a regular basis in the near future.
EPS is calculated as a company's profit divided by the outstanding shares of its common stock. The resulting number serves as an indicator of a company's profitability. EPS is a widely used metric to estimate corporate value.
The SEO has asked listed companies to tap the technical expertise of authorized market analysts, asset managers and financial advisory firms in drafting their EPS reports.
Given the increasing number of listed companies, share market authorities are now aware of the need to improve transparency in financial reporting to minimize unwanted volatility emanating from lack of financial literacy and lack of valid data about the actual performance of listed companies.
