Backtest of the Price-to-Sales ratio in Switzerland and France

The Price-to-Sales (P/S) ratio compares the price of a stock to the company's sales per share. Unlike the Price-to-Earnings, the P/S is not affected by the cost structure of companies and by accounting tricks.

Methodology

To determine the effectiveness of this ratio on the Swiss and French market, I ran a backtest between 2004 and 2024. Stocks were ranked from highest to lowest P/S, then divided into quintiles. The process was repeated every twelve months during the observation period and the performance of each quintile analyzed. The results were adjusted to take into account dividends, stock splits and other corporate events that could affect the value of the shares.

For the turnover, I took into account that of the most recent half-year, by annualizing it. I opted for this method because the results are slightly better than by retaining the sales of the previous twelve months.

Backtest results in Switzerland

In Switzerland, the results of the retrospective study show that companies with a low P/S ratio outperform those with a high ratio.

Global market

Annual profitability in % by quintile since 2004 (in CHF)

However, the progression across the quintiles is far from smooth. The third quintile is the best, while the fifth, which includes the least expensive companies in terms of their sales, ends up in penultimate position. It even performs slightly worse than the market.

Comparison with peers

The P/S ratio has a reputation for performing better in comparison with peers, within industries. Indeed, this approach works much better for the 5th quintile. We even obtain a result significantly better than the market. On the other hand, it discriminates less effectively against the most expensive stocks (1st quintile). Once again, we do not find a regular progression across the quintiles.

Within industries: annual profitability in % by quintile since 2004 (in CHF)

The results obtained are less effective and less robust than those we had achieved for the PER and dividend yield. What happens if we break down the analysis according to the size of the company?

According to capitalization

Whether we consider large, mid, small and very small capitalizations, the conclusions remain disappointing: the stocks judged to be the least expensive on the basis of the price/sales (P/S) ratio show a performance below that of the market. In the large and mid-cap segment, they even rank among the worst performers!

Small, Micro and Nano-Caps: Comparison with Peers

The only exception is Small & Micro-Caps, when their P/S is compared to peers within industries. There, we can observe slightly more interesting data.

Within industries: annual profitability in % by quintile since 2004 (in CHF)

Here we find a result very close to that obtained on the previous graph (all capitalizations combined). Above all, we find a more regular progression, although far from perfect, between the quintiles.

In summary, when compared within industries, and more for small caps, the P/S works in Switzerland. However, it is less efficient and less robust than the PER or the dividend yield.

Analysis of results in France

In France, the backtest results are even more questionable.

Global market

Companies with lower price-to-sales ratios tend to underperform significantly. In fact, their profitability is often negative, barely higher than that of the most expensive companies.

Annual profitability in % by quintile since 2004 (in CHF)

Comparison with peers

The situation is somewhat better when comparing P/S within industries. The 5th quintile performs better than the market, but is outperformed by all previous quintiles except the 1st.

Within industries: annual profitability in % by quintile since 2004 (in CHF)

Big and Mid-Caps: Comparison with Peers

Taking into account the size of companies, we see that in France, unlike in Switzerland, the price/sales (P/S) ratio is more efficient in large and medium-sized companies.

Within industries: annual profitability in % by quintile since 2004 (in CHF)

It is in this specific situation that the price/sales ratio (P/S) displays its best performances in France, thus surpassing the universe of large and mid-caps. However, these results lack solidity. Indeed, we observe that there is no regular progression between the different quintiles. Even more surprisingly, it is with the third quintile that we obtain the highest profitability.

Conclusion

Our retrospective study of the Price-to-Sales ratio over the last 20 years in Switzerland and France provides us with the following lessons:

• P/S is less effective than P/E or Yield in predicting a stock's future profitability
• P/S works better in Switzerland than in France (not to be confused with the PS, but we could have said the same :-))
• P/S is more effective when compared among peers within industries
• P/S works best with small businesses in Switzerland
• P/S works best with medium and large companies in France

As a single valuation ratio, whether in Switzerland or in France, the P/S is therefore not optimal. However, it is a factor that has proven its effectiveness in various research studies (see my book). We will see in the future whether, combined with other indicators, it can stand out.