What is a price to sales ratio?

The price-to-sales (better known as P/S) ratio is a tool that investors and analysts use to evaluate a stock. P/S ratio shows how much investors are willing to pay for each dollar of sales. P/S ratio is mostly relevant when used to compare companies from the same branch. When the P/S ratio is low, a stock might be undervalued, and the other way around.

The P/S ratio has an equation, and it is calculated two ways:

  • By dividing the company’s market cap by its total revenues over a designated period, which is usually twelve months, but can be quarterly etc;
  • By dividing the individual stock price by sales per share.

The P/S ratio is also called a  "sales multiple" or "revenue multiple.".

One thing to note is that the P/S ratio is by no means perfect. It doesn’t take into account whether the company makes any earnings if it will ever make earnings. On top of that, it does not account for debt and is bad for comparing companies from different sectors.