Ask Colin

Kenneth Fisher talks about using Price:Sales ratios and buying stocks with PSRs of .75 or less and selling when PSRs rises between 3 and 6. He believes that the PE ratios are relatively unimportant and that PSRs are more important. Have you ever used PSRs?

I have read his book and his proposition is very persuasive. The key ideas are that sales are harder to manipulate than profits and that in the early stages of growth companies, it is sales rather than profits which are important.

I think the Internet bubble exposed one problem with this - the implicit assumption in Fisher's work is that the company will make a profit. Many Internet companies were never going to make profits. However, by the same token, those companies would all have been outside his ratios anyway.

More practical considerations also intervene - in terms of scanning lots of companies, PERs are readily available and PSRs are not. So, I think there is merit in doing the initial scans on PERs, and only looking for PSRs for your final choices between growth companies.