Price to Sales

Price-to-sales ratio, is a valuation metric for stocks. It is calculated by dividing the company’s market cap by the company’s revenue in the most recent year; or, equivalently, divide the per-share stock price by the per-share revenue.

Unless otherwise stated, P/S is “trailing twelve months” (TTM), the reported sales for the four previous quarters, although of course longer time periods can be examined.

The smaller this ratio (i.e. less than 1.0) is usually thought to be a better investment since the investor is paying less for each unit of sales. However, sales do not reveal the whole picture, as the company may be unprofitable with a low P/S ratio. Because of the limitations, this ratio is usually used only for unprofitable companies, since they don’t have a price/earnings ratio (P/E ratio).The metric can be used to determine the value of a stock relative to its past performance. It may also be used to determine relative valuation of a sector or the market as a whole.

Price/Sales Ratios vary greatly from industry to industry, mainly due to the assumption that when comparing firms, they all have an identical capital structure. This is always a problematic assumption, but even more so when the assumption is made between industries, as they often have vastly different typical capital structures (for example, a utility vs. a technology company).  Therefore the Price/Sales Ratios are most useful in comparing similar stocks within an industry,.sector or sub-sector.

Example: Google’s Price/Sales Ratio: 4.86 (TTM)

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