Even though IOI uses a value-based approach to investing, we also understand that market risk – the risk that the stock price of a company one is invested in may temporarily move even further away from its fair value – is an important consideration.
One tool that we use to assess market risk in our IOI Tear Sheets is an estimate of possible best- and worst-case prices based on our operational projections and a company’s historical price-to-sales ratio values. (This is separate from the approach we use to derive best- and worst-case valuation scenarios.)
This 17-minute video explains how to analyze ratio statistics for a company using Excel, discusses how to use that analysis to make an assessment of the potential for market risk, and also talks about why we prefer to use price-to-sales rather than more common measures like price-to-earnings or price-to-book.