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While browsing through the content on SmartMoney Select, I came across a rather interesting article talking about three ratios that can be used together to find undervalued stocks. The three ratios being the price/sales (P/S) ratio, the price/earnings (P/E) ratio, and the third being the price/cash flow (P/CF) ratio. At first these three ratios seems like the most common ratios that one should use when screening for stocks, but I would tend to think that a lot of people wouldn’t even bother thinking about the implications of these three ratios when used together.

When used together, these three ratios basically make sure that a company isn’t “manipulating” any one of the above mentioned ratios in order to make the company look stronger than it really is. If a company, lets say, was to increase their sales by cutting down on profit margins (or even in an extreme case, taking a loss on the products that they are selling) to make their P/S ratio look a lot appealing the P/E ratio would counter that, by showing an inflated price for the earnings that a company is raking in.

On the other hand, if a company was to cut down on costs extremely to deflate the P/E ratio and as a result under-valuing the stock price, it is very likely that the company is too busy with cutting down on costs and is ignoring the growth or the expansion of the company. This would lead to a stable or even inflated P/S ratio which should raise eyebrows and alert investors that something is wrong.

Lastly, the P/CF ratio serves as a balance for both the P/E and P/S ratio as the P/CF ratio will simply show how well a company is doing in terms of raking in actual (or physical) cash at the time being instead of taking into consideration accrued (money earned, but not yet collected) income which can be represented in the P/E and P/S ratios.

Lastly, I would like to say that an excellent free stock-screener is the Yahoo! Finance Stock Screener, or even better yet, the subscription-based SmartMoney Select Stock Screener.