Polly Truheart eagerly read through her morning Investor's Business Daily, scanning the specialized tables to find the stocks whose prices had the largest percentage gains the day before. Sitting right on top of the list was Z-MATI <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ZMTX)") else Response.Write("(Nasdaq: ZMTX)") end if %>, which had leapt from $17 5/8 to $22 5/8 yesterday. Her interest piqued, Polly went over to her computer to sign online and do some research.

Jumping straight Online to the Motley Fool's FOOLWIRE, Polly saw the reason for the sizable gain. Z-mati had recently announced a promising application for its high-speed LSD-X technology. Z-mati was going to be able to use a chip made by semiconductor giant MOTO-ROTO <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MOR)") else Response.Write("(NYSE: MOR)") end if %> to develop high-speed LSD-X modems for video-on-demand and broadcast services.

LSD-X was one of a family of LSD-based technologies that allowed computer users to connect to the Internet through the use of psychedelics. Instead of using plain old computers to access online information, users could literally imagine themselves on a multi-colored information superhighway. "Imagine passing through a tie-die barrage of pastels to get that intra-day quote," the LSD-X materials promised.

Well, Polly could hardly believe her eyes. This all seemed too good to be true. She considered for a moment her recent experience with FLYOMEGA <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FLYO)") else Response.Write("(Nasdaq: FLYO)") end if %>, but suddenly she had the overwhelming compulsion to dial her discount brokerage's 800 line to place an order.

Three blocks away, Mo-Mental cackled. Poor Polly Truheart was caught in his web again. Using his bizarre telepathic powers, he pushed Polly to order.

"Order the stock, Polly... dial that phone."

Polly's face twitched as she attempted to fight the urge. "Must ... buy ... stock." Her hand began to lift the receiver when suddenly she was distracted by tinkling bells. A red-gloved hand pushed her own hand downward, and the phone went back to rest on the cradle.

"Think a moment before buying that stock, Polly. Z-mati has only $12.2 million in trailing sales." Motley Fool's deep, calm voice reminded Polly suddenly of Adam West. "With 18.59 million shares outstanding and the stock at $22 5/8, the price/sales ratio is a heart-stopping...."

Suddenly, Motley's face began to twitch as Mo-Mental turned his mental powers on him. "Think of the market potential, Motley. The unlimited market potential." Motley Fool stumbled backwards, gripping his head.

READERS! Help Motley Fool ward off Mo-Mental's evil powers. Figure out Z-mati's price sales ratio for him!

1) 28.3

2) 34.5

3) 0.03

4) 14.9

The answer is 2,
but that's not the end of the story, tipster buster:

A surge of willpower allowed Motley to break free of Mo-Mental's evil power. "Must... fight... urge." Motley Fool began chanting Z-mati's price/sales ratio to himself, saying over and over, "34.5... 34.5... 34.5...."

How did Motley come up with that figure? He took the number of shares outstanding multiplied it times the price of the stock, then divided by the company's revenues in the past year. With 18.59 million shares outstanding, and a price of $22 5/8 when the market closed yesterday, Z-mati has a market capitalization of $420.6 million. Divided by the trailing sales of $12.2 million, the price/sales ratio is:

       Shares * Price   18.59 million * 22.625
P/S = --------------- = ---------------------- = 34.5
       Revenues           12.2 million

Motley put his arm around Polly's shoulder, walking her away from the phone.

"Polly, with the average mature growth company having a price/sales ratio of between 1.0 and 2.0, Z-mati would need to grow its sales by somewhere between 1723% to 3450% until it is reasonably valued," Motley emphasized.

"Manufacturing sales don't grow 200% or more per year without having a lot of capacity lined up to make LSD-X devices. Even if Z-mati's meets the most generous growth expectations, it will still take years for the current valuation to catch up with the fundamentals of the company." Tipping his belled chapeau, Motley went to exit out the way he came, through the front door.

"Motley, why don't you fly through the window or something?" Polly called after him.

"I'm not a superhero, ma'am, I'm just a Fool."

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