What Is the Price-to-Sales Ratio?
The price-to-sales ratio, or P/S, compares a company's value with its revenue. It shows how many dollars investors pay for each dollar of yearly sales.
How to calculate P/S
A company is worth $20 billion and sells $10 billion a year. Its P/S is 2. You pay $2 for every $1 of yearly sales. Market cap is the company's total value on the market.
When to use P/S instead of P/E
The P/E ratio needs profit. Many young companies have none yet. P/S still works, because almost every company has sales. That makes it popular for judging fast-growing companies that are still losing money.
What is a good P/S ratio?
It depends a lot on the profit margin. A company that keeps 30 cents of every dollar can deserve a much higher P/S than one that keeps 2 cents. Compare with similar businesses, not across industries.
The catch
Sales are not profit. A company can grow sales fast and still never make money. Use P/S together with margins and free cash flow.
See it in real companies
Open a company to see what it sells and how it makes money.