The price-to-sales (P/S) ratio is a valuation ratio that compares a company’s stock price to its revenues. It is an indicator of the value that financial markets have placed on each dollar of a company’s sales or revenues.
The P/S ratio is a key analysis and valuation tool for investors and analysts. The P/S ratio shows how much investors are willing to pay per dollar of sales. It can be calculated either by dividing the company’s market capitalization by its total sales over a designated period (usually twelve months) or on a per-share basis by dividing the stock price by sales per share. The P/S ratio is also known as a sales multiple or revenue multiple.
Like all ratios, the P/S ratio is most relevant when used to compare companies in the same sector. A low ratio may indicate the stock is undervalued, while a ratio that is significantly above the average may suggest overvaluation.
To determine the P/S ratio, one must divide the current stock price by the sales per share. The current stock price can be found by plugging the stock symbol into any major finance website. The sales per share metric is calculated by dividing a company’s sales by the number of outstanding shares.
P/S Ratio = MVS / SPS
where:
MVS=Market Value per Share
SPS=Sales per Share
Source: Investopedia, Price-to-Sales (P/S) Ratio: What It Is, Formula To Calculate It, accessed 24 December 2023, <https://www.investopedia.com/terms/p/price-to-salesratio.asp>
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