Reference no: EM132902538

Question - The Bank of MF is a California-based equity investment consulting company. The company primarily provides advises to both institutional and individual investors. The company is specialized in fundamental analysis that involves collecting and evaluating the accounting statements of publicly traded companies.

Gil Thorpe was an employee of the Bank of MF. He recently left the Bank of MF and established a competing investment consulting company across the street from the headquarter of the Bank of MF. In order to expand his client base, Thorpe is advertising a new financial ratio that he uses in the relative valuation. The ratio is the price-sales ratio. The numerator of the ratio is stock price per share. The denominator of the ratio is net revenue per share. Thorpe suggests that since the variation of net revenue also affects common shareholders' dividend payments, the price-sales ratio is consistently defined. In addition, he claims that the price-sales ratio can capture the volatility in net revenue, which is a critical characteristic that the price-earnings ratio fails to reflect. Therefore, Thorpe is advocating for the price-sales ratio in the practice of relative valuation.

Is Thorpe's reasoning of using the price-sales ratio justifiable? Why?