Price–sales ratio, P/S ratio, or PSR, is a valuation metric for

stock In finance, stock (also capital stock) consists of all the shares by which ownership of a corporation or company is divided.Longman Business English Dictionary: "stock - ''especially AmE'' one of the shares into which ownership of a company ...

s. It is calculated by dividing the company's

market capitalization Market capitalization, sometimes referred to as market cap, is the total value of a publicly traded company's outstanding common shares owned by stockholders. Market capitalization is equal to the market price per common share multiplied by t ...

by the

revenue In accounting, revenue is the total amount of income generated by the sale of goods and services related to the primary operations of the business. Commercial revenue may also be referred to as sales or as turnover. Some companies receive reven ...

in the most recent year; or, equivalently, divide the per-share stock price by the per-share revenue. :

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 = 
\frac
 = 
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The justified P/S ratio is calculated as the price-to-sales ratio based on the

Gordon Growth Model In finance and investing, the dividend discount model (DDM) is a method of valuing the price of a company's stock based on the fact that its stock is worth the sum of all of its future dividend payments, discounted back to their present value. In ...

. Thus, it is the price-to-sales ratio based on the company's fundamentals rather than . Here, is the

sustainable growth Sustainable development is an organizing principle for meeting human development goals while also sustaining the ability of natural systems to provide the natural resources and ecosystem services on which the economy and society depend. The desir ...

rate as defined below and is the required rate of return. :

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Where

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. Unless otherwise stated, P/S is "trailing twelve months" (TTM), the reported sales for the four previous quarters, although of course longer time periods can be examined. The smaller this ratio (i.e. less than 1.0) is usually thought to be a better investment since the investor is paying less for each unit of sales. However, sales do not reveal the whole picture, as the company may be unprofitable with a low P/S ratio. Because of the limitations, this ratio is usually used only for unprofitable companies, since they don't have a

price–earnings ratio The price-earnings ratio, also known as P/E ratio, P/E, or PER, is the ratio of a company's share (stock) price to the company's earnings per share. The ratio is used for valuing companies and to find out whether they are overvalued or under ...

(P/E ratio). The metric can be used to determine the value of a stock relative to its past performance. It may also be used to determine relative valuation of a

sector Sector may refer to: Places * Sector, West Virginia, U.S. Geometry * Circular sector, the portion of a disc enclosed by two radii and a circular arc * Hyperbolic sector, a region enclosed by two radii and a hyperbolic arc * Spherical sector, a po ...

or the

market Market is a term used to describe concepts such as: *Market (economics), system in which parties engage in transactions according to supply and demand *Market economy *Marketplace, a physical marketplace or public market Geography *Märket, an ...

as a whole. PSRs vary greatly from sector to sector, so they are most useful in comparing similar stocks within a sector or sub-sector. Comparing P/S ratios carries the implicit assumption that all firms in the comparison have an identical capital structure. This is always a problematic assumption, but even more so when the assumption is made between industries, since industries often have vastly different typical capital structures (for example, a utility vs. a technology company). This is the reason why P/S ratios across industries vary widely.

References

Financial ratios {{econ-stub

See also

References