What are the Price-to-Sales (P/S) Ratio?

The price-to-sales (P/S) ratio may be a valuation ratio that compares a company’s stock price to its revenues. it's an indicator of the worth placed on each dollar of a company’s sales or revenues.

The price-to-sales (P/S) ratio is often calculated by either dividing the company's market capitalization by total sales over a representative period - typically twelve months or by dividing the stock price by the per-share sales on a per-share basis.

The price-to-sales (P/S) the ratio is additionally known as "sales multiple" or "revenue multiple".

Price-to-Sales (P/S) Ratio formula

P/S Ratio=   Market Value per Share
                  
                           Sales per Share

To determine the price-to-sales (P/S) ratio, one must divide the present stock price by the sales per share. the present stock price is often found by plugging the symbol into any major finance website.

The sales per share metric are calculated as dividing a company’s sales by the number of outstanding shares.

What Price-to-Sales (P/S) Ratio Can Tell You

The price-to-sales ratio may be a key analysis and valuation tool for investors and analysts. The ratio shows what proportion investors are willing to pay per dollar of sales.

Like all ratios, the price-to-sales (P/S)  ratio is most relevant when wont to compare companies within the same sector.

A coffee ratio may indicate the stock is undervalued, while a ratio that's significantly above the typical may suggest overvaluation.

The typical 12-month period used for sales within the price-to-sales ratio is usually the past four quarters (trailing 12 months), or current financial year.

A price-to-sales ratio that's supported forecast sales for the present year is named a forward ratio.

Limitations of Using P/S Ratio

The P/S ratio doesn’t take into consideration whether the corporate make any earnings or whether it'll ever make earnings.

Comparing companies in several industries can prove difficult also. Companies that make video games will have different capabilities when it involves turning sales into profits, compared to the likes of grocery retailers.

As well, P/S ratios don't account for debt loads or the status of a company’s record.

That is, a corporation with virtually no debt is going to be more attractive than a highly levered company with an equivalent P/S ratio.