Price-to-Sales (P/S) Ratio

Key takeaways
* The P/S ratio measures how much investors pay for each dollar of a company’s sales.
* It is calculated as Market Capitalization ÷ Total Sales (or Price per Share ÷ Sales per Share).
* Best used to compare companies within the same industry; a lower P/S may indicate undervaluation relative to peers.
* P/S ignores profitability and debt—use it alongside earnings- and balance-sheet–based metrics.
* Enterprise Value-to-Sales (EV/Sales) is a more complete alternative because it accounts for debt and cash.

What the P/S ratio is

The price-to-sales (P/S) ratio is a valuation multiple that links a company’s market value to its revenue. It answers: how much is the market paying for each dollar of sales? Because sales are harder to manipulate than earnings, the P/S ratio can be useful, especially for firms with little or volatile earnings.

How to calculate

Two equivalent forms:
* Company level: P/S = Market Capitalization ÷ Total Sales (over the chosen period)
* Per-share basis: P/S = Price per Share ÷ Sales per Share

Typical choices for “Total Sales”:
* Trailing twelve months (TTM) — most common
* Last fiscal year
* Forward (projected) sales — yields a forward P/S

Example formulas:
* P/S = Market Cap / TTM Sales
* P/S = Share Price / (TTM Sales ÷ Shares Outstanding)

How to interpret P/S

• Compare P/S ratios across companies in the same sector. Different industries have very different margins and capital structures, so cross-industry comparisons can be misleading.
• A lower-than-peer P/S may suggest the stock is undervalued, but this could reflect weak margins, low growth prospects, or high leverage.
• A higher-than-peer P/S may reflect superior growth expectations, stronger margins, or simply overvaluation.

Limitations

P/S is useful but incomplete:
* It does not reflect profitability — two companies with identical sales can produce very different earnings.
* It ignores capital structure and cash on the balance sheet.
* Industry differences (e.g., software vs. retail) mean P/S should not be used in isolation.
Because of these gaps, P/S should be combined with profitability and balance-sheet metrics.

EV/Sales: a more comprehensive alternative

Enterprise Value-to-Sales (EV/Sales) uses enterprise value instead of market cap. Enterprise value = Market Cap + Debt + Preferred Stock − Cash. EV/Sales therefore accounts for a company’s debt and cash position, making it a more complete measure than P/S, especially when capital structure varies across peers.

Examples

Acme Co. (illustrative)
* Shares outstanding: 100 million
* Current share price: $10
* TTM sales: $455 million
* Sales per share = $455M ÷ 100M = $4.55
* P/S (TTM) = $10 ÷ $4.55 ≈ 2.20
* If projected sales for the current fiscal year = $520 million:
* Sales per share = $5.20
* Forward P/S = $10 ÷ $5.20 ≈ 1.92
If sector peers average P/S = 1.5, Acme’s higher P/S could reflect stronger expected revenue growth or a premium valuation.

Apple (illustrative numbers)
* Revenues (example year): $274.5 billion
* Shares outstanding: 16.53 billion
* Sales per share = $274.5B ÷ 16.53B ≈ $16.60
* With a hypothetical stock price of $145, P/S ≈ $145 ÷ $16.60 ≈ 8.73
Comparisons: firms with lower P/S may look cheaper on a sales basis, but margin and debt differences must be considered.

How to use P/S in analysis

• Start with sector-relative comparisons rather than absolute thresholds.
• Combine P/S with:
• Profitability metrics (net margin, operating margin, EBITDA margin)
• Earnings multiples (P/E), when earnings exist
• Balance-sheet measures (debt-to-equity, cash levels)
• EV/Sales to incorporate leverage and cash
• Growth rates — high-growth companies often justify higher P/S multiples
• Use trailing and forward P/S to see how expectations affect valuation.

Bottom line

The P/S ratio is a simple, helpful way to gauge how the market values a company’s revenue. It is most informative when used to compare companies inside the same industry and when paired with profitability and balance-sheet metrics. For a fuller view of value that accounts for leverage and cash, consider EV/Sales alongside P/S.