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.
The calculator follows a five-step process to compute the P/S ratio:
P/S Ratio Formulas:
Steps:
Calculating the P/S ratio is crucial for:
Example (Company X): Price per Share = $30.00, Sales = $15,000,000, Shares Outstanding = 1,000,000:
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:
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:
A P/S ratio of 3.75 suggests the stock may be overvalued relative to sales, but attractiveness depends on industry comparisons.
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.