P/S – Price-to-Sales Ratio

Price-to-Sales Ratio (P/S) measures how much investors pay for each dollar of company revenue. It's especially useful for evaluating companies that don't yet report profit.

How P/S is Calculated

Basic formula:

\text{P/S} = \frac{\text{Market Capitalization}}{\text{Annual Revenue}}

Or per share:

\text{P/S} = \frac{\text{Stock Price}}{\text{Revenue per Share}}

Revenue is total sales income (top line)
Usually trailing twelve months (TTM) revenue is used

How to Interpret the Result

The value indicates how many dollars investors pay for each dollar of annual revenue.

P/S	Interpretation
< 1	Potentially undervalued
1–2	Low valuation
2–5	Average valuation
5–10	Above-average valuation
> 10	Premium valuation, high expectations

Example: A company has market cap of $2 billion and annual revenue of $500 million. P/S is 4. Investors pay $4 for every $1 of revenue.

When P/S is Useful

P/S is the preferred metric for:

Unprofitable companies – young, growth companies without profit
Cyclical companies – profit fluctuates, revenue is more stable
Turnaround situations – company is recovering from losses
Margin comparison – companies in the same industry with different profitability

P/S vs. P/E

Aspect	P/E	P/S
Negative denominator	Cannot use	Always positive
Manipulation	Profit can be influenced	Revenue is more transparent
Margins	Implicitly accounted for	Not accounted for
Suitability	Profitable companies	Growth, unprofitable companies

Importance of Margins

P/S ignores profitability – this is both an advantage and disadvantage:

Company	P/S	Net Margin	Actual Value
A	2	20%	Good – high margin
B	2	5%	Worse – low margin

Company A with P/S of 2 and 20% margin is cheaper than Company B with P/S of 2 and 5% margin, because it creates more profit from revenue.

Combining P/S with margin:

\text{P/E} = \frac{\text{P/S}}{\text{Net Profit Margin}}

A company with P/S of 2 and 10% margin has P/E = 20.

Industry Differences

Typical P/S values:

Utilities – 1–2 (low growth, stable)
Retail – 0.3–1 (low margins)
Industrials – 1–2 (various margins)
Consumer Staples – 2–4 (brands)
Software, SaaS – 5–15+ (high growth, scalability)
Biotechnology – 10–50+ (no revenue, speculative)

EV/Sales – Better Alternative

For more accurate comparison, EV/Sales is used:

\text{EV/Sales} = \frac{\text{Enterprise Value}}{\text{Revenue}}

EV/Sales accounts for leverage and cash, which P/S ignores.

Limitations of P/S

Ignores margins – company with low margins may look cheap
Ignores leverage – high debt is not accounted for
Revenue growth vs. quality – not all revenue is equally valuable
Accounting policies – revenue recognition may vary

Rule of 40 for SaaS

For SaaS companies, the Rule of 40 is used:

\text{Revenue Growth (%)} + \text{FCF Margin (%)} \geq 40

Companies meeting this rule deserve higher P/S.

How to Use the Indicator in Practice

For comprehensive valuation, combine P/S with:

P/E – if company is profitable
Gross Margin – product profitability
Net Profit Margin – overall profitability
Revenue Growth – growth rate

Practical Tip

Low P/S for a company with high margins is an attractive combination. Conversely, high P/S for a company with low margins requires belief in future profitability improvement. Before investing, verify that the company has a path to profitability, and compare P/S with competitors in the same industry.