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The price-to-sales ratio (P/S ratio or PSR) is a
financial ratio A financial ratio or accounting ratio states the relative magnitude of two selected numerical values taken from an enterprise's financial statements. Often used in accounting, there are many standard ratios used to try to evaluate the overall fin ...
used to assess a company's
market value Market value or OMV (open market valuation) is the price at which an asset would trade in a competitive auction setting. Market value is often used interchangeably with ''open market value'', ''fair value'' or '' fair market value'', although t ...
relative to its
revenue In accounting, revenue is the total amount of income generated by the sale of product (business), goods and services related to the primary operations of a business. Commercial revenue may also be referred to as sales or as turnover. Some compan ...
. It is calculated by dividing the company's
market capitalization Market capitalization, sometimes referred to as market cap, is the total value of a publicly traded company's outstanding common shares owned by stockholders. Market capitalization is equal to the market price per common share multiplied by ...
by its total revenue over a specified period, typically the trailing twelve months (TTM), or equivalently, by dividing the per-share stock price by the per-share revenue. Investors use this metric to gauge how much they are paying for each dollar of a company's sales, often as an alternative to the price-to-earnings ratio (P/E ratio) when earnings are negative or volatile. The P/S ratio is particularly useful for valuing unprofitable companies, as it relies on revenue rather than
profit Profit may refer to: Business and law * Profit (accounting), the difference between the purchase price and the costs of bringing to market * Profit (economics), normal profit and economic profit * Profit (real property), a nonpossessory inter ...
, which may be absent or distorted by accounting practices. A lower ratio (e.g., below 1.0) may suggest a stock is undervalued, while a higher ratio could indicate overvaluation, though interpretation depends on industry norms and company context. The ratio can also track a stock’s valuation over time or compare companies within the same sector.


Calculation

The price-to-sales ratio is expressed as: : \text = \frac = \frac * Market capitalization: The total value of a company's outstanding
shares In financial markets, a share (sometimes referred to as stock or equity) is a unit of equity ownership in the capital stock of a corporation. It can refer to units of mutual funds, limited partnerships, and real estate investment trusts. Sha ...
, calculated as stock price multiplied by the number of shares. * Revenue: Total sales or income over a period, typically the trailing twelve months (TTM) unless otherwise specified. A justified P/S ratio adjusts this metric based on fundamentals, derived from the Gordon Growth Model. It incorporates the
profit margin Profit margin is a financial ratio that measures the percentage of profit earned by a company in relation to its revenue. Expressed as a percentage, it indicates how much profit the company makes for every dollar of revenue generated. Profit margi ...
, dividend payout ratio, sustainable growth rate (''g''), and required rate of return (''r''): : \text = \text \times \text \times \frac Here, the growth rate ''g'' is calculated as: : g = \text \times \text where the retention ratio is 1 minus the payout ratio, and
return on equity The return on equity (ROE) is a measure of the profitability of a business in relation to its equity; where: : Jason Fernando (2023)"Return on Equity (ROE) Calculation and What It Means" Investopedia Thus, ROE is equal to a fiscal year's net in ...
(ROE) reflects profitability relative to shareholders' equity.


Interpretation

A low P/S ratio may indicate a potential bargain, but it does not account for profitability or expenses, limiting its standalone usefulness. It is most effective for unprofitable firms lacking a P/E ratio or for comparing similar companies within a sector, where revenue patterns are more consistent. However, P/S ratios vary widely across industries due to differences in typical capital structures (e.g., technology vs. utilities), making cross-sector comparisons less reliable.


See also

*
Financial ratio A financial ratio or accounting ratio states the relative magnitude of two selected numerical values taken from an enterprise's financial statements. Often used in accounting, there are many standard ratios used to try to evaluate the overall fin ...
* Price-to-earnings ratio * Price-to-cash-flow ratio


References

{{DEFAULTSORT:Price-Sales Ratio Financial ratios