Price to Sales Ratio

Definition

The price to sales ratio compares a company's stock price to its revenue in order to show how much investors are willing to pay for each dollar of sales for a given stock.

Calculation

P/S Ratio = Market Value per Share/ Sales per Share

As an example, let's say that Company A has a market value per share of $20 and a sales per share of $18

$20/$18 = 1.11 Price to Sales.

What this tells investors is that in order to buy $1 of Company A's sales they must spend $1.11.

Why is this important?

The lower the P/S Ratio the better. Securities that have low price to sales are seen as offering the most potential for future price appreciation. Additionally, price to sales helps identify companies that could be considered under or overvalued in comparison to companies that are within the same industry.

Financial Glossary Reference

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