Price-to-Sales (P/S) Ratio

Valuation Metric Investment Wiki — Fundamentals
The Price-to-Sales (P/S) Ratio compares a company's market capitalization to its revenue. It shows how much investors are willing to pay for one dollar of sales. It is predominantly used for valuing early-stage or fast-growing companies that are not yet profitable.
Quick Reference
Type Valuation Metric
Formula Market Capitalization ÷ Total Revenue
Value Target < 1.5
Best Used For High-growth tech stocks, loss-making companies

1.0 The Formula

Basic Form

formulaP/S = Market Capitalization / Total Revenue (or Sales)
Alternatively: P/S = Share Price / Revenue per Share

Because revenue is a top-line figure found on the Income Statement, it cannot be manipulated by accounting tricks (like depreciation or tax credits) as easily as Net Income.

Worked Example

Company Market Cap Revenue P/S Ratio
Tech Startup $10 Billion $500 Million 20x
Supermarket $5 Billion $25 Billion 0.2x

Tech startups trade at high P/S ratios because their software carries gross margins of 80%+. A supermarket may only have gross margins of 3%, so investors pay very little for its sales volume.

2.0 Interpretation & Edge Cases

The Margin Problem

Evaluating a company solely on P/S is dangerous. A dollar of sales with a 10% margin is radically different from a dollar of sales with a 90% margin. Two companies can have a P/S of 5.0, but if one is burning cash and the other is printing profit, the ratio obscures reality.

A company with massive debt might have a low Market Cap, causing its P/S ratio to look deceptively cheap. You should prefer Enterprise Value to Sales (EV/Sales) when dealing with highly indebted companies.

3.0 Related Pages

P/E Ratio

The standard valuation metric. P/S is used when the P/E ratio is negative or undefined.

Enterprise Value (EV)

Used to swap Market Cap out for EV to account for debt in the EV/Sales multiple.