The Current Ratio, P/E, P/S, P/B

Liquidity and valuation over time

To finish out one last thought from yesterday, with a cutoff of 1.5 for the current ratio, there isn’t a ton of volatility in firms over or under over time:

That’s not the case with the P/E ratio:

And for price-to-sales, that’s been steadily declining over time:

Another valuation metric we haven’t covered yet is price-to-book. There are a few ways to calculate this but the simplest is to just use equity for book value:

This too is in historically bad shape:

Overall, things are pricey! How much so? Well, when we apply these four new cut off metrics to our list of potential stocks in the EM100 along with the four recent cut off metrics we have been using for profitability, not a single company passes all eight tests! That doesn’t mean there aren’t any stocks to buy - just that we won’t find a “perfect” one that can satisfy every rule of thumb very easily.

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