The “P/S” Ratio
The Price to sales ratio is a valuation ratio that compares a company’s stock price to its sales/revenues.
It’s an important metric for investors to consider when evaluating a company’s stock as it can provide insight into the company’s growth potential.
The formula = P/S Ratio = Price per share/Sales per share
important Notes
- This can be used with any company but it is most helpful for companies that do not have recent positive earnings (they have losses), like companies having a momentary downtrend or new and emerging companies who are not profitable yet.
- For example, Zomato in it’s initial days, etc.
Pros
- Less susceptible to accounting shenanigans. More difficult to manipulate or adjust sales numbers than earnings.
- Relatively stable metric. Revenue is (generally) more stable than earnings that can be volatile.
Cons
- It doesn’t take profitability into account.
What is a good P/S Ratio?
- Usually a range of 1.0-2.0 is good.
- Less than 1.0 is excellent.