Research On Combination Of P/S Ratio & Gross Profit Ratio: Application On Company Value Judgment In A-share Market

In the early 1990 s, Shenzhen and Shanghai exchanges have been established in, which opened the era of finance. With the successful resolution of the equity division and promotion of supporting measures, securities market gradually moves toward standardization and the unhealthy trend of speculation gradually turn to investment. Index analysis method in the company’s investment value judgment is widely used. The existing evaluation system has inherent defect, such as single indicator and unclear relationship between indicators. In order to compensate for that, the paper introduces a new perspective: P/Sratio and gross profit ratio index. Then do research on combination of P/S ratio & gross profit ratio index and on their application to company value judgment in A-share market.Firstly, the paper introduces the absolute valuation method and relative valuation method briefly. At the same time it describes what P/S ratio and gross profit ratio are from three parts of connotation, role and limitations, which in order to combination research on the two indicators is very necessary and beneficial. Then the paper explains why choose P/Sratio and gross profit ratio to judge company value from three angles of comprehensiveness, uniqueness and relationship with two important investment strategy: value investment strategy and growth investment strategy. At last, the paper illustrates the application of combination of P/S ratio and gross profit ratio in two stages. The first stage is about application on all industries. Compare P/Sratio and gross profit ratio of the 56 industries and the result shows that P/Sratio and gross profit ratio from low to high with the industries from backwardness to advancement. In order to clarify the various performance of P/S ratio and gross profit ratio performance, the paper divide all industries to four quadrants: the first quadrant(high P/Sratio and high gross profit ratio), the second quadrant(low P/Sratio and high gross profit ratio), the third quadrant(low P/Sratio and low gross profit ratio), the four quadrant(high P/Sratio and low gross profit ratio). The industry classification results show that the majority of the industry is located in the first and third quadrants. The second stage is about application on companies of two especial industries. One is the internet technology service industry belonging to the first quadrant, and the other is metal smelting and processing industry belonging to different investment value groups based on three indicators of P/Sratio, gross profit ratio and gross profit ratio year-on-year increase. The article then proves the effectiveness of combination of P/Sratio & gross profit ratio by returns testResearch on combination of P/Sratio & gross profit ratio and on their application to company value judgment in A-share market so as to help scholars and stock investors open up new investment perspective outside of the traditional evaluation index system. Therefore, it can help to prompt investors to apply value investment concept and development investment philosophy to achieve excess returns of target acquisition, and then form a good atmosphere of rational investment in the whole society.