Price-to-sales (P/S) ratio

Definition

The price-to-sales (P/S) ratio is a valuation metric that compares a company's stock price to its revenue. It is calculated by dividing the market capitalization by the total sales or revenue over a specified period.

5 Must Know Facts For Your Next Test

1. A lower P/S ratio may indicate that a stock is undervalued, while a higher P/S ratio could suggest overvaluation.
2. The P/S ratio does not account for profitability, making it less comprehensive than other metrics like the P/E ratio.
3. It is particularly useful for evaluating companies in industries with volatile earnings or those that are not yet profitable.
4. The P/S ratio can be used to compare companies within the same industry but may be less useful across different sectors.
5. Investors often use the P/S ratio in conjunction with other financial ratios and metrics to get a fuller picture of a company's valuation.

Review Questions

• How do you calculate the price-to-sales (P/S) ratio?
• Why might investors use the P/S ratio instead of the P/E ratio for certain companies?
• What are some limitations of using the P/S ratio for stock valuation?

Related terms

Price-to-Earnings (P/E) Ratio: A valuation metric that compares a company's current share price to its per-share earnings.

Market Capitalization: The total market value of a company's outstanding shares, calculated by multiplying the share price by the number of shares.

Revenue: The total amount of money generated from sales or services before any expenses are deducted.