The Price-Quality Ratio is a new idea to one Fool -- let's see if it's something that can make us money.
Yes, it's a new idea for me too. The Price-Quality Ratio, or PQ, was developed by ADVFN and they describe it as a measure of how expensive a company's cash flow is, considering its gearing and level of intangibles.
The formula is:
PQ = (share price / cash flow per share) x [(total liabilities / (total assets - intangibles)] x Exponential(intangibles / total fixed assets)
The cash flow per share figure is taken as operating cash flow, i.e. before deduction of interest and tax. I don't know how they actually derived this complex relationship, but as cash flow is something close to the hearts of many Fools I thought the PQ was worth taking a look at.
So which companies are rated as 'expensive', and which as 'cheap', using this measure? Looking at the FTSE 350, and excluding investment trusts, the ten most expensive are:
... and the cheapest:
Nothing immediately strikes me as good or bad about either set of companies, but maybe the PQ is indicating something we wouldn't otherwise notice. Curiosity having gotten the better of me, I've set up a test to see if there's any correlation between this ratio and subsequent share price performance.
I'll report back in three months, when we should have the first indication as to whether the PQ can help us in our stock-picking.