Price-to-sales (P/S) ratio, also known as revenue multiple, is a popular valuation metric used by investors, analysts, and companies to evaluate the performance and current market valuation of a business. It measures a company's market value relative to its annual revenue.
P/S ratio is calculated by dividing a company's market capitalization by its annual revenue. This metric is commonly used in industries with low profit margins or negative earnings, where earnings-based metrics like price-to-earnings (P/E) ratio can not be used. P/S ratio is also useful for comparing companies with different capital structures.
The formula for P/S ratio is as follows:
P/S ratio = Stock Price / TTM Revenue per share
Or another way to calculate the P/S ratio is by using the following formula:
P/S ratio = Market capitalization / TTM Revenue
For example, if a particular company has a market capitalization of $1 billion and annual revenue of $100 million, its P/S ratio would be 10.
The average P/S ratio varies widely across industries. Here is a table showing average revenue multiples by industries in the US as of Nov 2024:
Industry | Average P/S ratio | Number of companies |
---|---|---|
Advertising Agencies | 1.49 | 24 |
Aerospace & Defense | 1.96 | 53 |
Agricultural Inputs | 1.27 | 11 |
Airlines | 0.51 | 12 |
Apparel Manufacturing | 0.91 | 16 |
Apparel Retail | 0.87 | 29 |
Asset Management | 3.36 | 77 |
Auto Manufacturers | 1.33 | 16 |
Auto Parts | 0.88 | 47 |
Auto & Truck Dealerships | 0.56 | 14 |
Banks - Diversified | 4.29 | 6 |
Banks - Regional | 3.82 | 299 |
Beverages - Non-Alcoholic | 2.62 | 12 |
Beverages - Wineries & Distilleries | 2.08 | 7 |
Biotechnology | 7.99 | 519 |
Broadcasting | 0.59 | 15 |
Building Materials | 3.35 | 9 |
Building Products & Equipment | 2.14 | 29 |
Business Equipment & Supplies | 0.87 | 7 |
Capital Markets | 3.08 | 37 |
Chemicals | 1.5 | 18 |
Communication Equipment | 1.9 | 47 |
Computer Hardware | 2.04 | 27 |
Conglomerates | 0.77 | 13 |
Consulting Services | 1.97 | 16 |
Consumer Electronics | 2.64 | 12 |
Credit Services | 2.25 | 45 |
Department Stores | 0.31 | 5 |
Diagnostics & Research | 3.91 | 64 |
Discount Stores | 0.98 | 8 |
Drug Manufacturers - General | 4.81 | 12 |
Drug Manufacturers - Specialty & Generic | 3.43 | 46 |
Education & Training Services | 1.81 | 17 |
Electrical Equipment & Parts | 2.02 | 41 |
Electronic Components | 2.4 | 32 |
Electronic Gaming & Multimedia | 2.76 | 7 |
Electronics & Computer Distribution | 0.56 | 5 |
Engineering & Construction | 1.39 | 31 |
Entertainment | 1.57 | 40 |
Farm & Heavy Construction Machinery | 0.94 | 23 |
Farm Products | 1.14 | 16 |
Financial Data & Stock Exchanges | 5.74 | 11 |
Food Distribution | 0.22 | 9 |
Footwear & Accessories | 0.99 | 11 |
Furnishings, Fixtures & Appliances | 0.86 | 21 |
Gambling | 1.7 | 11 |
Gold | 2.9 | 28 |
Grocery Stores | 0.65 | 10 |
Healthcare Plans | 0.52 | 12 |
Health Information Services | 3.66 | 34 |
Home Improvement Retail | 1.41 | 7 |
Household & Personal Products | 1.85 | 25 |
Industrial Distribution | 1.66 | 17 |
Information Technology Services | 2.53 | 53 |
Insurance Brokers | 3.51 | 12 |
Insurance - Diversified | 1.77 | 12 |
Insurance - Life | 1.27 | 14 |
Insurance - Property & Casualty | 1.75 | 37 |
Insurance - Reinsurance | 1 | 8 |
Insurance - Specialty | 2.4 | 17 |
Integrated Freight & Logistics | 1.3 | 16 |
Internet Content & Information | 3.12 | 39 |
Internet Retail | 1.54 | 25 |
Leisure | 1.28 | 25 |
Lodging | 1.35 | 9 |
Luxury Goods | 0.56 | 6 |
Marine Shipping | 1.44 | 24 |
Medical Care Facilities | 1.24 | 39 |
Medical Devices | 4.09 | 97 |
Medical Distribution | 0.75 | 7 |
Medical Instruments & Supplies | 5.63 | 45 |
Metal Fabrication | 1.53 | 13 |
Mortgage Finance | 2.27 | 17 |
Oil & Gas Drilling | 1.16 | 7 |
Oil & Gas E&P | 2.15 | 62 |
Oil & Gas Equipment & Services | 1.25 | 48 |
Oil & Gas Integrated | 1.16 | 6 |
Oil & Gas Midstream | 1.63 | 36 |
Oil & Gas Refining & Marketing | 0.56 | 17 |
Other Industrial Metals & Mining | 1.72 | 19 |
Other Precious Metals & Mining | 3.6 | 13 |
Packaged Foods | 1.37 | 43 |
Packaging & Containers | 1.15 | 20 |
Paper & Paper Products | 0.37 | 5 |
Personal Services | 1.52 | 11 |
Pharmaceutical Retailers | 0.54 | 7 |
Pollution & Treatment Controls | 2.27 | 10 |
Publishing | 1.08 | 7 |
Railroads | 2.71 | 8 |
Real Estate - Development | 3.08 | 10 |
Real Estate - Diversified | 4.5 | 4 |
Real Estate Services | 2.43 | 25 |
Recreational Vehicles | 0.82 | 14 |
REIT - Diversified | 5.5 | 20 |
REIT - Healthcare Facilities | 5.66 | 17 |
REIT - Hotel & Motel | 1.98 | 15 |
REIT - Industrial | 8.53 | 16 |
REIT - Mortgage | 4.1 | 39 |
REIT - Office | 3.53 | 24 |
REIT - Residential | 7.04 | 18 |
REIT - Retail | 7.15 | 24 |
REIT - Specialty | 5.55 | 16 |
Rental & Leasing Services | 1.77 | 20 |
Residential Construction | 1.35 | 20 |
Resorts & Casinos | 1.28 | 18 |
Restaurants | 1.07 | 43 |
Scientific & Technical Instruments | 3.85 | 24 |
Security & Protection Services | 2.07 | 14 |
Semiconductor Equipment & Materials | 4.69 | 25 |
Semiconductors | 4.32 | 66 |
Software - Application | 4.54 | 194 |
Software - Infrastructure | 5.05 | 98 |
Solar | 1.62 | 13 |
Specialty Business Services | 1.51 | 27 |
Specialty Chemicals | 1.93 | 44 |
Specialty Industrial Machinery | 2.97 | 77 |
Specialty Retail | 0.89 | 39 |
Staffing & Employment Services | 1.3 | 23 |
Steel | 0.68 | 15 |
Telecom Services | 1.59 | 33 |
Thermal Coal | 1.54 | 9 |
Tobacco | 2.82 | 5 |
Tools & Accessories | 2.09 | 10 |
Travel Services | 1.58 | 12 |
Trucking | 1.25 | 12 |
Utilities - Diversified | 2.75 | 15 |
Utilities - Regulated Electric | 2.57 | 25 |
Utilities - Regulated Gas | 2.05 | 14 |
Utilities - Regulated Water | 3.97 | 13 |
Utilities - Renewable | 2.88 | 12 |
Waste Management | 3 | 12 |
The data presented in the table above shows that, the REIT - Industrial industry has the highest average P/S ratio of 8.53, followed by Biotechnology at 7.99. In contrast, the Food Distribution industry has the lowest average P/S ratio of 0.22, followed by the Department Stores industry at 0.31.
Industry | Average P/S ratio | Number of companies |
---|---|---|
REIT - Industrial | 8.53 | 16 |
Biotechnology | 7.99 | 519 |
REIT - Retail | 7.15 | 24 |
REIT - Residential | 7.04 | 18 |
Financial Data & Stock Exchanges | 5.74 | 11 |
REIT - Healthcare Facilities | 5.66 | 17 |
Medical Instruments & Supplies | 5.63 | 45 |
REIT - Specialty | 5.55 | 16 |
REIT - Diversified | 5.5 | 20 |
Software - Infrastructure | 5.05 | 98 |
Industry | Average P/S ratio | Number of companies |
---|---|---|
Food Distribution | 0.22 | 9 |
Department Stores | 0.31 | 5 |
Paper & Paper Products | 0.37 | 5 |
Airlines | 0.51 | 12 |
Healthcare Plans | 0.52 | 12 |
Pharmaceutical Retailers | 0.54 | 7 |
Auto & Truck Dealerships | 0.56 | 14 |
Electronics & Computer Distribution | 0.56 | 5 |
Luxury Goods | 0.56 | 6 |
Oil & Gas Refining & Marketing | 0.56 | 17 |
Some industries have higher revenue multiples (or P/S ratios) than others due to several reasons. One of the primary reasons is growth potential. Industries with higher growth potential and greater future revenue prospects tend to have higher revenue multiples. For example, technology companies tend to have higher revenue multiples than other industries because they have a greater potential for future growth and earnings.
Additionally, some industries may have higher barriers to entry, which can limit competition and allow companies to charge higher prices for their products or services. This can result in higher revenues and higher revenue multiples. Conversely, industries with lower barriers to entry may have more competition and lower revenue multiples.
Another factor that can impact revenue multiples is profitability. Companies that are highly profitable may have higher revenue multiples because investors are willing to pay more for their shares. This is because highly profitable companies can generate more earnings per share, which can lead to higher stock prices and higher P/S ratios.
Finally, investor sentiment and market conditions can also impact revenue multiples. During periods of market optimism and high investor confidence, revenue multiples across all industries may be higher. Conversely, during times of market pessimism or economic downturns, revenue multiples may be lower as investors become more risk-averse.
While the P/S ratio (or revenue multiple) is a useful metric for evaluating the valuation of a company, it also has some limitations. Here are some of the limitations of P/S ratio:
It's important to use P/S ratio in conjunction with other valuation metrics and to consider a range of factors when evaluating a company's valuation.
P/S ratio is just one of several valuation metrics used by investors and analysts. Other metrics, such as P/E ratio and discounted cash flow analysis, can provide a more comprehensive view of a company's valuation. However, P/S ratio is useful for identifying companies with high revenue growth potential and for comparing companies with different capital structures.