Price-to-Sales (P/S) Ratio

The price-to-sales ratio compares a company market value with its revenue, calculated as market cap divided by annual sales, or share price divided by sales per share. It is useful for valuing companies that are not yet profitable, since it relies on revenue rather than earnings. Lower ratios can indicate cheaper valuations relative to sales.

Use P/S to value early-stage or growth companies with little or no profit, and to compare firms within the same industry. Because it ignores profitability, a low P/S is not automatically cheap; a company may have weak margins. Pair it with margin and growth analysis to avoid value traps.

A company with a market cap of 2 billion dollars and annual revenue of 500 million dollars has a P/S ratio of 4, meaning investors pay 4 dollars for every dollar of yearly sales.