Price to sales ratio

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    The price to sales (P/S or PSR) ratio shows the current stock price relative to the total sales per share of a company.

    Typically the P/S takes into the account the previous 12 months and it can be calculated using the following formula:

    Price to sales ratio

    It is similar to the price to earnings ratio, but the price to sales ratio shows the value from a market point of view.

    A company with a small ratio (i.e. less than 1.0) is considered a better investment as the investor pays less for each unit of sales. Note that sales do not reveal a complete picture — a low P/S could indicate an unprofitable company. Indeed, the P/S ratio is generally only used for unprofitable companies, as they won’t have a price/earnings ratio (P/E ratio).

    The P/S ratio is important because it can be used to measure the value of young companies that do not have any earnings yet. However, when considering buying shares of newly established companies, it is advisable to take into account much more information than just the price to sale ratio; it does not take into account debt or expenses.

    The price-to-sales ratio is usually used to compare PSR’s within the same industry, to the market itself or against a company’s historical data where it exists (which it may not for a very new company).