Another estimate of Electromed's valueI wanted to make another attempt to find the market value of Electromed using a different method.
The price to sales ratio is often used to value technology firms. Technology firms typically have price/earnings ratios in the 5-20 range. Firms with higher profit margins and higher sales growth usually have higher ratios than their less successful peers.
Now, I've seen the 25%/year figure given for the market growth of the medical imaging sector, so I expect that Electromed might be looking at similar growth. If so, that would be excellent. I also assume that their profit margin is quite high, so I expect that the market will award Electromed with a high price to earnings ratio, perhaps in the 10-20 range.
Let's be more conservative, though and go with a single digit: 8.
I don't know Electromed's expected revenues for this year but I believe that the figure mentioned on this board was $10 million. Certainly, that seems like a reasonable estimate.
At a p/s of 8, that would indicate a market cap for Electromed of $80,000,000!!!
Now using my assumption of 52,000,000 shares of Electromed/Itec to be outstanding after the reverse takeover (but before the 6 for 1 consolidation), that market cap. indicates a market value for the shares of about
$1.54/sh
So, if the Electromed deal succeeds, this analysis indicates a fair market value for Itec shares of about $1.54.
Let's be even more conservative and assume that, initially, the market only awards Electromed with a p/s of 5 (relatively modest for a tech firm). We are still looking at an indicated fair market value of 0.96/sh. About twice its present level.
Let's through caution to the wind, though, and look to 2001. Let's be wildly optimistic and say that, by then, Electromed might have an annual revenue of $15,000,000. Given a sales growth that exceeds the industry average, the market is now awarding Electromed with a p/s ratio of 20. That would mean a market cap of $300,000,000. How likely is that? Well, consider that lots of Canadian companies in the itech sector are awarded similar market caps on even lower sales.
Given that market cap, what it Electromed/Itec's fair price (still pre-consolidation, mind you)?
$5.77/sh
So, how does that strike you? Using a different technique, in my last post, I guessed that Itec's shares are worth a minimum of 0.70/sh and more likely in the 1.35-4.00 range (based on comparing it to a sector peer).
In this analysis, using the p/s method, I'm coming up with similar numbers. A likely minimum indicated of about .90/sh with a more likely indicated range of 1.50-5.75/sh.
Be warned. I'm just a beginner at this type of analysis. I have no insider knowledge of either Electromed or Itec and some of my guesses may be based on mistaken assumptions; however, I am somewhat comforted in that my two attempts yielded similar figures. Do your own research.
Let's hear some comments. Anyone have any other guesses? Are there any obvious mistakes in my attempts?
If you'd like to find out more about using the price/sales ratio, check out this Forbes page:
https://www.forbes.com/tool/html/97/oct/1007/side1c.htm