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.
Learn the skills required to excel in data science and data analytics covering R, Python, machine learning, and AI.

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

Take the Next Step in Your Data Career

Join our membership for lifetime unlimited access to all our data analytics and data science learning content and resources.