Valuation Models Go Up In Smoke

Students often ask us how stocks are valued in the "real world." While analysts go into more depth than we do in this textbook, commonly used models are PE ratios, EV/EBITDA ratios, and free cash flow models, which we have discussed. However, in some cases, these valuation models go up in smoke. Take a look at Cannabis Sativa (CBDS), which is trading at just under $2 per share and has a market cap of about $31 million. The company has had negative earnings for the past three years, but more importantly, had revenues of $8,000 through the first 9 months of 2015 and $7,000 in 2014! Since the company has had no earnings, the PE ratio is not reported, but the PS ratio is almost 2,000. All-in-all, CBDS is priced at an extremely high growth rate.