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What is the Price to Sales Ratio?

Updated: Apr 9, 2023

Price/sales (P/S) is a valuation ratio used in financial analysis to compare a company's stock price to its revenue per share. It is calculated by dividing a company's current market capitalization (the current share price multiplied by the number of outstanding shares) by its total revenue over the past 12 months.

The P/S ratio is often used as an alternative to the price-to-earnings (P/E) ratio, especially for companies that are not profitable or have inconsistent earnings. The P/S ratio measures the market's valuation of a company relative to its revenue rather than its earnings.

Generally, a lower P/S ratio may indicate that a company is undervalued, while a higher P/S ratio may indicate that the company is overvalued. However, it is important to compare the P/S ratio of a company to its peers in the same industry to gain a better understanding of its valuation.

Like any financial ratio, the P/S ratio should be used in conjunction with other analysis methods and should not be the sole determinant of an investment decision.

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