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Price to Sales (P/S) Ratio Calculator

P/S Ratio Formula

dollars/share
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shares
dollars/share
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1. What is the Price to Sales (P/S) Ratio Calculator?

Definition: This calculator computes the Price to Sales (P/S) Ratio, a financial metric that measures a company’s stock price relative to its sales per share, indicating how much investors pay per dollar of revenue.

Purpose: Helps investors evaluate a company’s valuation, particularly for firms with low or negative earnings, and compare companies within the same industry to identify undervalued or overvalued stocks.

2. How Does the Calculator Work?

The calculator follows a five-step process to compute the P/S ratio:

P/S Ratio Formulas:

SPS=SalesNumber of Shares Outstanding
P/S Ratio=Price per ShareSPS
Where:
  • Sales: Most recent annual sales or revenue from the income statement (dollars)
  • Number of Shares Outstanding: Total common shares traded in the market (shares)
  • Price per Share: Current market price per share (dollars/share)
  • SPS: Sales per Share (dollars/share)

Steps:

  • Step 1: Obtain the most recent sales. Find the sales figure from the company’s income statement in its annual report.
  • Step 2: Obtain the number of shares outstanding. Source this from the company’s annual report or financial websites.
  • Step 3: Calculate sales per share. Divide the sales by the number of shares outstanding.
  • Step 4: Obtain the price per share. Retrieve the current market price from financial websites like Yahoo Finance.
  • Step 5: Calculate the P/S ratio. Divide the price per share by the sales per share.

3. Importance of P/S Ratio

Calculating the P/S ratio is crucial for:

  • Valuation Analysis: A lower P/S ratio may indicate undervaluation, while a higher ratio suggests overvaluation, particularly useful for companies with inconsistent earnings.
  • Industry Comparison: Enables investors to compare revenue-based valuations across companies in the same sector.
  • Growth Assessment: Reflects market expectations for revenue growth, with lower ratios potentially signaling undervalued growth opportunities.

4. Using the Calculator

Example (Company X): Price per Share = $30.00, Sales = $15,000,000, Shares Outstanding = 1,000,000:

  • Step 1: Sales: $15,000,000
  • Step 2: Shares Outstanding: 1,000,000
  • Step 3: Sales per Share: 15,000,0001,000,000=15.00 dollars/share
  • Step 4: Price per Share: $30.00
  • Step 5: P/S Ratio: 30.0015.00=2.00 times
  • Result: SPS = $15.00, P/S Ratio = 2.00 times

A P/S ratio of 2.00 is moderate, suggesting fair valuation if aligned with industry averages, but potentially overvalued compared to peers with lower ratios.

Example 2: Price per Share = $50.00, Sales = $20,000,000, Shares Outstanding = 2,000,000:

  • Step 1: Sales: $20,000,000
  • Step 2: Shares Outstanding: 2,000,000
  • Step 3: Sales per Share: 20,000,0002,000,000=10.00 dollars/share
  • Step 4: Price per Share: $50.00
  • Step 5: P/S Ratio: 50.0010.00=5.00 times
  • Result: SPS = $10.00, P/S Ratio = 5.00 times

A P/S ratio of 5.00 is high, indicating potential overvaluation unless justified by strong growth prospects or industry norms.

Example 3: Price per Share = $15.00, Sales = $10,000,000, Shares Outstanding = 2,500,000:

  • Step 1: Sales: $10,000,000
  • Step 2: Shares Outstanding: 2,500,000
  • Step 3: Sales per Share: 10,000,0002,500,000=4.00 dollars/share
  • Step 4: Price per Share: $15.00
  • Step 5: P/S Ratio: 15.004.00=3.75 times
  • Result: SPS = $4.00, P/S Ratio = 3.75 times

A P/S ratio of 3.75 suggests the stock may be overvalued relative to sales, but attractiveness depends on industry comparisons.

5. Frequently Asked Questions (FAQ)

Q: What is a good P/S ratio?
A: A P/S ratio below 2 is often considered attractive, indicating potential undervaluation, while ratios above 4 may suggest overvaluation. However, this varies by industry; compare to sector peers for context.

Q: Why is the P/S ratio useful for unprofitable companies?
A: Unlike P/E, the P/S ratio uses revenue, which is always positive, making it applicable for companies with losses or low earnings, such as startups or growth firms.

Q: Can the P/S ratio be misleading?
A: Yes, a low P/S ratio may not indicate undervaluation if the company has low profit margins or declining sales. Always consider profitability and industry trends alongside the P/S ratio.

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