The sales-to-market capitalization ratio of a company provides an idea of potential future stock price performance. The price-to-earnings ratio, which measures the net income of a firm per outstanding stock, is a more common metric for assessing investment alternatives. Sales-to-market cap provides a good alternative measure when the firm does not yet produce net income and the analyst can therefore not compute a price-to-earnings ratio.
Calculate the market capitalization of the firm. Market capitalization equals the share price multiplied by the number of outstanding shares. For publicly traded corporations, both figures are easy to access from a finance portal such as Yahoo! Finance (see Resources). If the firm in question is private, however, you will need to estimate a fair value for the shares based on recent transactions in your target firm or comparable companies. In such cases, try to find out at what price shares have changed hands in recent private transactions. If such information is not available for your target firm, similar-size public businesses in closely related industries provide the best benchmark for share price estimates.
Find net annual sales. For public companies this figure, too, is relatively easy to access from a finance site. When working with a private company, make sure to use net sales as opposed to gross sales. Net sales equal gross sales minus returned merchandise.
Since sales-to-market cap is frequently used for relatively young and growing firms, the sales over the most recent full year and may not always accurately represent the current sales pace. If sales are expected to increase sharply in the near future, it is more appropriate to use the estimated sales for the year which is yet to be completed. If you are calculating this ratio in September 2011, for example, and the firm is expected to sell far more this year than last year, use the estimated sales for 2011.
Divide net sales by market cap. The result is the sales-to-market cap ratio. If this figure is high compared with the firm's peers, the firms shares may be undervalued. If the ratio for the target firm is lower than the average ratio for the firm's peers, the stock may be relatively expensive. Keep in mind that the sales-to-market cap ratio is only one of various valuable metrics and does not rely on a single ratio or figure for investment decisions.