Part of my research for long-term investing involves determining the value of a company. When I am doing a quick evaluation to give me an idea on what stocks to do a more in depth analysis, I like to look at price ratios. Let's take a look at three companies in the Biotechnology Industry and compare how valuable they are side by side.
Price to Sales Ratio
Amgen Inc. (AMGN) 4.05
Gilead Sciences Inc. (GILD) 6.1
Biogen Idec Inc. (BIIB) 6.5
Industry 280.77
When I think about value I have to think about the potential growth. How much potential growth is there? Something called the price to sales ratio gives me the best indicator of this. The lower the price/sales ratio, the healthier it is. This is the price an investor pays for $1.00 of the company's sales. The industry looks a bit misleading through MSN Money. But looking at these three companies, Amgen must be given the edge since it comes in at only two thirds of the other companies.
Price to Cash Flow Ratio
Amgen Inc. 12.2
Gilead Sciences Inc. 20.9
Biogen Idec Inc. 20.2
Industry 22.4
If I ask how much money is flowing through this company as compared to its price, I am looking at the price to cash flow ratio. The closer the ratio gets to that magical "100" the less capability a company has for profit. At "100" the company can just pay its bills with nothing left over. Even though all three companies are below the industry average here, I have to give the edge to Amgen again. It does a much better job managing its cash flow than the other two.
Price to Earnings Ratio
Amgen Inc. 15.9
Gilead Sciences Inc. 23.4
Biogen Idec Inc. 25.9
Industry 26.6
The final ratio I look at is the price to earnings ratio. This gives me an idea of how much an investor pays for $1.00 of the company's earnings. The less an investor pays for $1.00 of earnings, the better value the company has. Just like I saw in the last ratio comparison (price to cash flow), all three companies appear to be doing better than the industry average. But Amgen stands head and shoulders above the rest.
If I am comparing these three companies side by side and I would pick one that I consider a more valuable investment, I would have to choose Amgen based upon these three price-ratio comparisons. I would take this company and do a more detailed fundamental analysis. All ratio comparisons where done through MSN Money.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
