Join Jim Stice for an in-depth discussion in this video Using price-to-sales ratios, part of Running a Profitable Business: Revenue Recognition.
- Let's talk about the price to sales ratio,…or P/S ratio, sometimes called the sales multiple.…As mentioned earlier in this course,…this P/S ratio is often used to estimate values…of new companies, companies that don't yet have…net income because of high startup costs.…The price to sales ratio is defined as follows;…price to sales ratio equals the market value…of the company, divided by the sales of the company.…We can then perform some very sophistacted…algebra on this expression to get the following…equation.…The market value of the company equals sales,…multiplied by the price to sales ratio.…
So, if I know the average price to sales ratio of…ten companies in an industry,…then I can estimate a reasonable value…for the eleventh company by multiplying…its reported sales number by this industry…price to sales ratio.…Let's say that companies in an industry…have an average P/S ratio of 2.…This means that a new company, in this industry,…with sales of $8,000, should be worth…about $16,000, total market value,…or two times its annual sales.…
But without recognizing revenue, a company can't hope to report any profit. Accordingly, company management is typically under great pressure to recognize revenue as soon as possible. Want to understand these concepts better? Join professors Jim and Kay Stice as they introduce the theory, practice, and implications of revenue recognition. Together they demonstrate how this seemingly innocent accounting topic can turn a reported profit into a reported loss, sometimes with multibillion dollar implications for company values.
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- Defining revenue recognition
- Timing revenue recognition
- Understanding multi-element transactions
- Valuing companies
- Reviewing the great revenue frauds and scandals of history