Price to sales ratio

A company's market cap divided by the company's annual sales (or revenue) gives us the price to sales ratio.

Updated February 2019

The price-to-sales (p/s) ratio is the market capitalisation of a company divided by its revenues. So a company that has a market value of £25bn and sales of £10bn has a p/s ratio of 2.5. This is sometimes also known as a "sales multiple". All else considered, the lower the number, the cheaper the stock. The p/s is calculated in a similar way to other metrics such as the price/earnings (p/e) ratio (market capitalisation divided by profits). But of course, sales aren't the same as profits, so the p/s may at first glance appear less useful as a gauge of whether a firm is cheap or not.

Advertisement - Article continues below

However, it can be a helpful tool when looking at firms or sectors where earnings are temporarily depressed as a result of one-off factors, but which are later expected to return to a more normal level (as is often the case with companies in cyclical industries). Comparing companies using p/s rather than p/e may be more effective in this case. It may also be used when comparing early stage growth stocks operating in the same industry. Again, these firms may be expanding rapidly, but not yet making a profit, rendering the p/e useless. By comparing them based on p/s, an investor can work out how much the market is paying for each pound or dollar of sales.

However, investors must ensure any assumptions they make about how profitable a company will be in the future are realistic.A business with a low p/s ratio but no prospect of ever achieving a profit will be a poor investment.Also, as with the p/e ratio, the p/s ratio does not take any debt into account. Generally a heavily indebted company is riskier and less appealing than one that has no debt at all (assuming you are comparing companies within the same industry). To get a picture that includes debt, you need to find the enterprise value (EV) which adds debt to the market cap and divide it by sales. Overall, as with all ratios, p/s should not be used in isolation.

Watch Tim Bennett's video tutorial: What is the price-to-sales ratio?





A bond is a type of IOU issued by a government, local authority or company to raise money.
19 May 2020

Quantitative investing

Quantitative investing uses sophisticated computer-based mathematical models to identify and carry out trades.
8 May 2020

Quantitative easing (QE)

Quantitative easing (QE) involves electronically expanding a central bank's balance sheet.
8 May 2020

Emerging markets

An emerging market is an economy that is becoming wealthier and more advanced, but is not yet classed as "developed".
24 Jan 2020

Most Popular

EU Economy

Here’s why investors should care about the EU’s plan to tackle Covid-19

The EU's €750bn rescue package makes a break-up of the eurozone much less likely. John Stepek explains why the scheme is such a big deal, and what it …
28 May 2020
Industrial metals

Governments’ money-printing mania bodes well for base metals

Money is being printed like there is no tomorrow. Much of it will be used to pay for infrastructure projects – and that will be good for metals, says …
27 May 2020

As full lockdown ends, what are the risks for investors?

In the UK and elsewhere, people are gradually being let off the leash as the lockdown begins to end. John Stepek looks at what risks remain for invest…
29 May 2020