P/S Ratio

Market cap divided by revenue; useful for unprofitable companies.

The Price-to-Sales (P/S) ratio is a valuation metric that compares a company's stock price or total market capitalization to its annual revenue. It measures how much investors are willing to pay for every dollar of sales generated by the business. Because it relies on top-line revenue rather than bottom-line earnings, it is particularly popular for valuing early-stage, high-growth, or cyclical companies that are not yet profitable. To calculate the ratio, you divide the company's total market capitalization by its total sales over a 12-month period, or divide the individual share price by the sales per share. Investors generally look for a lower P/S ratio relative to industry peers, which can suggest the stock is undervalued. Conversely, a high P/S ratio indicates that investors are paying a premium, expecting significant future growth to justify the price. While the P/S ratio is highly useful because sales are harder to manipulate with accounting tricks than net income, it has notable limitations. A company can have high revenue and a low P/S ratio but still be losing money due to high operating costs. Therefore, the metric is most effective when used alongside profitability metrics and compared only within the same industry, as profit margins vary drastically between sectors.

Company A has a market capitalization of $500 million and generated $100 million in revenue over the last 12 months. Its P/S ratio is calculated as $500 million / $100 million = 5.0x. This means investors are paying $5 for every $1 of sales the company generates.