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Chapter 15. Quick Prequalify > Valuation Ratios

Valuation Ratios

Valuation ratios tell you something about whether the market is pricing your candidate as a value, growth, or momentum stock. In this context, value stocks are out of favor; that is, they are of no interest to most market participants who prefer growth stocks. Momentum-priced stocks are not really a separate category; rather they are the most in-favor subset of the growth category. They have already substantially moved up in price, outrunning their fundamentals, and hence represent higher risk than growth-priced stocks.

Multex displays four valuation ratios: price/earnings (P/E), price/sales (P/S), price/book (P/B) and price/cash flow (P/CF). Each valuation ratio has its pluses and minuses. Your goal at this point, however, is simply to determine you candidate's category. The P/S ratio is, in my view best suited to the task. Again, there's no universal standard, but here are some guidelines for using the P/S ratio:


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