Price-to-Sales Ratio

Price-to-Sales Ratio

The Price-to-Sales (P/S) Ratio is a financial metric that compares a company’s Stock price to its Revenues per Share. It is calculated by dividing the Market Capitalization of the company by its total sales or Revenue over a specified period. The formula is:

P/S Ratio = Market Capitalization / Total Sales

This ratio is used by investors to assess a company’s valuation relative to its sales, providing insight into how much investors are willing to pay for each dollar of sales generated by the company. A lower P/S ratio may indicate that a Stock is undervalued, while a higher ratio could suggest overvaluation.

Examples

For instance, if a company has a Market Capitalization of $1 billion and reported total sales of $500 million over the past year, the P/S ratio would be:

P/S Ratio = $1,000,000,000 / $500,000,000 = 2

Cases

Consider two companies in the same industry:

• Company A: Market Cap = $800 million, Sales = $400 million, P/S Ratio = 2.0
• Company B: Market Cap = $1.2 billion, Sales = $600 million, P/S Ratio = 2.0

Even though both companies have the same P/S ratio, their Market Capitalizations and sales figures indicate different scales of operation and growth potential, which investors should consider before making investment decisions.