The price to sales ratio is a way to compare what the market values a company at with the sales that company brings in. It is often shortened to P/S. Sales are also called revenue, which means the total money a company earns from selling its products or services before any costs are taken out.
What the number means
The ratio tells you how many dollars investors are currently paying for each dollar of a company’s yearly sales. A P/S of 2 means the market values the company at two times its sales. A P/S of 0.5 means the market values it at half of its sales.
Many people like this ratio because sales are harder to bend than profit. A company can have no profit in a given year, or even a loss, and still have sales. So P/S can be used on young or growing companies that do not yet earn a profit. Ratios based on profit, such as price to earnings, would not work for them.
The price to sales ratio formula in words
The price to sales calculator on our site uses this formula: P/S = market cap / total sales over the last 12 months.
Market cap is short for market capitalization. It is the total value the stock market gives to a company. You get it by multiplying the share price by the number of shares outstanding. If a stock trades at 40 dollars and there are 50 million shares, the market cap is 40 x 50 million, which equals 2,000 million dollars, or 2 billion.
Total sales over the last 12 months is also called trailing twelve month revenue. It means the sales from the most recent four quarters added together. Using a full year avoids being fooled by one unusually strong or weak quarter.
In words, divide what the market says the company is worth by what the company sold in the past year.
A worked example
Take a made up company called Company A. Its shares trade at 40 dollars. It has 50 million shares outstanding. Over the last 12 months its sales were 500 million dollars.
Step one: find market cap. 40 x 50 million equals 2,000 million dollars.
Step two: divide by sales. 2,000 million divided by 500 million equals 4.
The P/S ratio is 4. In plain terms, the market values Company A at four dollars for every one dollar of yearly sales.
Now take Company B, in the same industry. Its market cap is 600 million dollars and its sales over the last 12 months were 800 million dollars. Divide 600 by 800 and you get 0.75.
So Company B has a P/S of 0.75. The market values it below its yearly sales. On this one measure, Company B looks cheaper than Company A. But that alone does not tell us which is the better company. We need to ask why the gap exists.
How to read the result
A low P/S can mean a company is priced cheaply compared with its sales. It can also mean the market has doubts about it. Maybe its profit margins are thin, its sales are shrinking, or it carries heavy debt. A high P/S can mean investors expect strong growth. It can also mean the stock has become pricey compared with what the business earns.
The ratio makes the most sense when you compare companies in the same industry. A grocery chain usually has low profit margins, so its P/S is often below 1. A software company can keep a larger share of each sales dollar as profit, so a higher P/S may be normal there. Comparing across such different businesses is like comparing a bakery with a bank.
Check the profit margin
Profit margin is the share of sales that is left as profit. Two companies with the same P/S can be very different if one keeps 20 cents of every sales dollar and the other keeps 2 cents. Looking at P/S together with the margin gives a fuller view.
Common mistakes
The first mistake is mixing up units. If market cap is in billions and sales are in millions, the answer will be off by a factor of 1,000. Put both numbers in the same unit before dividing.
The second mistake is using old sales. The tool is built around the last 12 months. Using a figure from two years ago will give a ratio that does not match today’s price.
The third mistake is treating a low ratio as a bargain by default. Cheap can be cheap for a reason.
The fourth mistake is comparing across industries without thinking. Margins differ so much between industries that the same P/S can mean very different things.
Limits of the tool
P/S ignores profit, debt and cash. A company with large debts is riskier than one with none, yet two such companies can show the same ratio. The ratio also says nothing about how fast sales are growing or shrinking. It looks at a single moment.
Sales figures can also be shaped by how a company counts revenue. Different accounting choices can change reported sales a little. For that reason, it is wise to read the company’s own reports as well.
Because it is a ratio of two numbers that change, the P/S moves every day as the stock price moves. A result today may not match the result next month.
Common questions
Is a lower P/S always better?
No. A low ratio can signal a bargain, but it can also signal problems. It is a starting point for questions, not an answer.
What is a normal P/S ratio?
It depends on the industry. Low margin businesses tend to have lower ratios, and high margin businesses tend to have higher ones. Compare a company with its own peers and its own past.
Can I use P/S for a company with no profit?
Yes. That is one of its main uses, since sales exist even when profit does not.
Where do I find market cap and sales?
Market cap is shown on most financial sites. Sales for the last 12 months are in the company’s reports. The glossary explains both terms.
How is P/S different from price to earnings?
Price to earnings compares price with profit. Price to sales compares price with revenue. P/S works when profit is zero or negative, but it ignores costs.
Try it yourself
Pick two companies in the same industry, look up their market cap and last 12 months of sales, and run both through the tool. Browse the other tools on the calculators page, explore price moves on Stockvert, or play Stock Jeopardy to practice the vocabulary.
The price to sales ratio is simple to calculate and easy to misread. Use it to compare similar companies, pair it with profit margin and debt, and remember that no single number can tell you the whole story of a business.
For free, neutral basics from the government, the SEC runs Investor.gov.
Positive Stocks is for education only. It is not investment advice. Investing involves risk, including loss of money. Do your own research and speak with a licensed professional.
