A healthy business with steady sales growth is the key to survival in today’s fast changing and highly competitive business environment. As such, superior revenues are necessary to drive growth, and most companies look for a strong relationship between sales growth levels and the value of an enterprise.
Revenues are income generated by a company through business activities. Though a company might not be profitable over a particular time period, it usually generates revenues unless there are unforeseen situations. In such cases, the company is valued on the basis of revenues. This is because sales growth (or decline) is usually an early indicator of the company’s future earnings performance.
The Price-to-Sales (P/S) ratio takes into account a company’s revenues when valuing it. It remains the key stock selection criteria keeping in mind that management usually has limited opportunities to manipulate revenue figures as it can with earnings.
While sales growth is an important metric for any corporate for the purpose of growth projections and strategic decision making, this in isolation doesn’t indicate too much about a company’s future prospects. Though it provides investors an insight into product demand and pricing power, a huge sales number does not necessarily convert into profits.
Therefore, a consideration of a company’s cash position along with its sales number can be a more dependable strategy. Substantial cash in hand and a steady cash flow give a company more flexibility with respect to business decisions and potential investments. Most importantly, an adequate cash position suggests that revenues are being channelized in the right direction.