Price to Sales (P/S) Ratio

P/S = Market Price per Share / Sales per Share

P/S Positives

  • Sales can be more difficult for management to manipulate than earnings or book value.
  • While earnings can be negative, sales are never negative.
  • Sales can be more consistent than earnings.
  • P/S can be useful for analyzing companies with no earnings, are cyclical, or have reached maturity.
  • Stock return trends can be analyzed within the context of differences in P/S values.

P/S Drawbacks

  • Unprofitable companies can still show sales growth.
  • P/S ratio does not reflect cost structure.
  • Different companies may have different revenue recognition policies.

Fundamental View of P/S Ratio

P0/S0 = [(Earning0/Sales0) × (Payout ratio) × (1 + Growth rate)] / (rce - g)

For a justified P/S ratio:

  • The P/S ratio increases as profit margin and sales growth increases.
  • The P/S ratio decreases as the required rate of return on common equity increases.
Finance Train Premium
Accelerate your finance career with cutting-edge data skills.
Join Finance Train Premium for unlimited access to a growing library of ebooks, projects and code examples covering financial modeling, data analysis, data science, machine learning, algorithmic trading strategies, and more applied to real-world finance scenarios.
I WANT TO JOIN
JOIN 30,000 DATA PROFESSIONALS

Free Guides - Getting Started with R and Python

Enter your name and email address below and we will email you the guides for R programming and Python.

Saylient AI Logo

Accelerate your finance career with cutting-edge data skills.

Join Finance Train Premium for unlimited access to a growing library of ebooks, projects and code examples covering financial modeling, data analysis, data science, machine learning, algorithmic trading strategies, and more applied to real-world finance scenarios.