The price to sales (P/S) ratio is a valuation ratio that measures a company’s stock price (market cap) compared to its revenues (also known as sales). It is an indicator of the "value" investors are placing on the company revenue.
The price to dales ratio is an easy way to understand the valuation of a company. It is especially useful for doing valuation on new companies and startups that don’t have (yet) net income or assets to base the valuation on.
The price to sales ratio formula can be done either on per share basis or by using the company total market cap value. The formula for the price to sales ratio is:
Price to sales ratio = Market cap / revenue
If done on per share bases the formula is:
Price to sales ratio = share price / revenue per share
The revenue value and total number of shares data can be found on the income statement.
Price to sales ratio is usually calculated for the trailing twelve months revenue data, unless stated otherwise.
Since the P/S ratio is a valuation ratio generally a lower ratio P/S ratio is consider better as it is a sign that the company's stock is undervalued. Generally companies that have higher growth expectations have higher P/S ratios as investors are willing to pay premium for the growth potential. As usual price to sales ratio can vary significantly from industry to industry or sector to sector and it is better to use it in comparison with similar type of businesses operating within the same industry or sector.
|Name||Price to sales (P/S)||Marketcap||Industry|
|CAH Cardinal Health Inc||0.09||$13.23B||Medical Distribution|
|MCK Mckesson Corp||0.1||$23.86B||Medical Distribution|
|ABC Amerisourcebergen Corp||0.1||$19.22B||Medical Distribution|
|AAL American Airlines Group Inc||0.15||$6.07B||Airlines|
|KSS KOHLS Corp||0.18||$3.18B||Department Stores|
The main operation in any business is to generate revenue (and profits) from the sale of goods and services, and the P/S ratio provides the valuation based on the operations of the company without any accounting adjustments. This is useful for getting a rough idea of a businesses valuations in different industries and sectors. However since the ratio does not include any type of accounting adjustment we need to be aware of its limitations. For example that it does not account for the leverage used by the company, does not provide any information about the profitability of the business or the cost of doing business etc.