CONCLUSION

The price-to-sales multiple and value-to-sales ratio are widely used to value technology firms and to compare value across these firms. An analysis of the fundamentals highlights the importance of profit margins in determining these multiples, in addition to the standard variables—the dividend payout ratio, the cost of equity, and the expected growth rates in net income for price to sales, and the reinvestment rate, cost of capital, and growth in property income for value to sales. Comparisons of revenue multiples across firms have to take into account differences in profit margins. One approach is to look for mismatches—low margins and high revenue multiples suggesting overvalued firms and high margins and low revenue multiples suggesting....