The price-to-sales ratio (P/S) compares what a company is worth on the market with its revenue. It's the multiple to reach for when the P/E fails: when the company doesn't yet make money.
How it's calculated
The P/S is found by dividing the market cap by annual revenue (or, equivalently, the share price by sales per share):
- Price-to-sales = Market cap ÷ Annual revenue
If a company is worth $10 billion on the market and bills $2 billion a year, its P/S is 5: the market pays five dollars for every dollar of annual sales.
What it's actually good for
Its real usefulness shows up in companies that aren't profitable yet. A young company in full expansion may be loss-making (and therefore have no P/E), but its sales are growing fast. Price-to-sales lets you put a price on that revenue growth before the profit has arrived. It's also useful in cyclical sectors, where profit collapses temporarily but sales are steadier.
The trap: sales aren't profit
Here's its big limitation. Selling a lot isn't the same as making money. Two companies with the same sales can have opposite results depending on their margin: one profitable, one losing money. That's why a low P/S doesn't mean "cheap" if the company barely earns: you always have to cross it with the margin to know whether those sales are worth anything to the shareholder.
How to use it well
Use price-to-sales as a complement, not a substitute for the P/E: it's the tool for companies without profits or in cyclical sectors, always paired with the margin and revenue growth. To see the revenue, margin and valuation of any company, type its ticker into the analyzer.