Why did you select the Price/Sales ratio for modelling as opposed to the more popular EV/EBITDA ratio?

Answer

The price/sales or P/S ratio has all the desirable characteristics of a variable to be modelled than other valuation ratios. Some of those advantages include:

• P/S is strictly positive, as both P & S are greater than zero, whereas other ratios such as EV/EBITDA, P/EBITDA, P/E, etc., can be negative which render them useless.

• Although EV can be calculated from transaction prices, detailed required information on debt is not always available. Thus, some transactions without such information will then have to be discarded.

• Log transformed P/S ratio is normally (or Gaussian) distributed, which satisfies requirements for any kind of regression.

Although our models use P/S ratio with the computed valuation, all the commonly used valuation metrics such as P/E, P/EBITDA, EV/EBITDA, and EV/Syu are available to be viewed as a summary of a group of assets as well as a time-series of such values.