Just about every investor is familiar with the price-to-earnings ratio, which measure's a company's stock price in relation to the profits it makes. But what happens when a company isn't profitable -- when it's not making money? Many business that are in their growth phase are plowing their money back into the business. What's an investor to do?
In this clip from the Industry Focus: Tech podcast, Motley Fool analysts Dylan Lewis and Simon Erickson talk about the price-to-sales ratio.
A transcript follows the video.
This podcast was recorded on Jun. 3, 2016.
Dylan Lewis: P/E can be kind of difficult for some of these companies. Particularly ones that don't have any GAAP incomes to report. Right? You talked about some other metrics that you can look to for success. What do you think about price to sales for these companies?
Simon Erickson: It's a good one for a tech but it's early on. Again, you wouldn't expect. There are very few companies in the tech industry that right when they're incorporated are immediately profitable. It just doesn't happen. They're plowing it into the business for reasons we talked about. Maybe a more appropriate metric for companies like that, that aren't profitable, is the price-to-sales metric. You can see the growth of the company at the top line and how valuable is that to investors when you're looking at the market.
Lewis: At least with that you kind of have something to hang your hat on as with a negative P/E ratio you're just like ... You don't know what to do with it, right?