# Price-to-Sales (P/S) Ratio Explained: Definition, Formula, Investment Insight

## What Is the Price-to-Sales (P/S) Ratio?

The price-to-sales (P/S) ratio is a powerful tool for investors aiming to evaluate stock value by measuring the relationship between a company's stock price and its revenue. By calculating the P/S ratio, investors can identify undervalued stocks and make informed investment decisions within the same sector. This article explains how to analyze the P/S ratio, calculate it, and compare it with strategies like the enterprise value-to-sales ratio for a comprehensive financial analysis.

### Key Takeaways

*   The price-to-sales (P/S) ratio helps investors compare a company's stock price to its sales, offering insights into the market's valuation of each dollar of sales.
*   A lower P/S ratio may indicate a stock is undervalued, while a higher ratio can suggest overvaluation relative to peers in the same sector.
*   The P/S ratio doesn't account for a company's earnings or debt, so it should be used alongside other financial metrics for a comprehensive analysis.
*   The enterprise value-to-sales (EV/Sales) ratio is more comprehensive than the P/S ratio because it accounts for debt and preferred shares, but is slightly more complex to calculate.

![Price-to-Sales (P/S) Ratio](https://www.investopedia.com/thmb/mSAgphHuLqR_8BlcFN26d_ePkXs=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Price_To_Sales_Ratio_Final_3-2-2063bb73d1544404bb93a14e4ddefb0e.jpg)

*— Investopedia / Candra Huff*

## Analyzing the Price-to-Sales (P/S) Ratio: A Guide

The P/S ratio is a key analysis and valuation tool for investors and analysts. The P/S ratio, also called a sales multiple or revenue multiple, [shows](https://www.investopedia.com/ask/answers/032515/what-considered-favorable-price-sales-ratio.asp) how much investors pay for each dollar of sales. Calculate it by dividing the market cap by total sales over twelve months, or by dividing the stock price by [sales per share](https://www.investopedia.com/terms/s/salespershare.asp). The P/S ratio is also known as a sales multiple or revenue multiple.

Like all ratios, the P/S ratio is most relevant when used to compare companies in the same sector. A low ratio may indicate the stock is [undervalued](https://www.investopedia.com/terms/u/undervalued.asp), while a ratio that is significantly above the average may suggest overvaluation.

The P/S ratio usually uses sales from the past four quarters (TTM) or the last fiscal year. If based on projected sales for the current year, it's called a forward P/S ratio.

To determine the P/S ratio, one must divide the current stock price by the sales per share. The current stock price can be found by plugging the stock symbol into any major finance website. The sales per share metric is calculated by dividing a company's sales by the number of [outstanding shares](https://www.investopedia.com/terms/o/outstandingshares.asp).

$\begin{aligned} &\text{P/S Ratio}=\frac{MVS}{SPS}\\ &\textbf{where:}\\ &MVS = \text{Market Value per Share}\\ &SPS = \text{Sales per Share}\\ \end{aligned}$

> **Important**
>
> As is the case with other ratios, the P/S ratio is of greatest value when it is used for comparing companies within the same sector.

The P/S ratio doesn't consider whether a company makes or will make earnings. Comparing companies in different industries can prove difficult as well. For instance, video game companies and grocery retailers have different abilities to turn sales into profits. Also, P/S ratios don't consider [debt](https://www.investopedia.com/terms/d/debt-load.asp) or the state of a company's [balance sheet](https://www.investopedia.com/terms/b/balancesheet.asp). That is, a company with virtually no debt will be more attractive than a highly leveraged company with the same P/S ratio.

While the P/S ratio doesn't take debt into account, the [enterprise value-to-sales ratio](https://www.investopedia.com/terms/e/enterprisevaluesales.asp) (EV/Sales) does. The EV/Sales ratio uses enterprise value, not market capitalization, unlike the P/S ratio. Enterprise value adds debt and [preferred shares](https://www.investopedia.com/terms/p/preferredstock.asp) to the market cap and subtracts cash. The EV/Sales ratio is said to be superior, although it involves more steps and isn't always as readily available.

## Applying the P/S Ratio: Real-World Examples

As an example, consider the quarterly sales for Acme Co. shown in the table below. The sales for fiscal year 1 (FY1) are actual sales, while sales for FY2 are [analysts' average forecasts](https://www.investopedia.com/terms/f/forecasting.asp) (assume that we are currently in the first quarter of FY2). Acme has 100 million shares outstanding, with the shares presently trading at $10 per share.

At the present time, Acme's P/S ratio on a trailing-12-month basis would be calculated as follows:

*   Sales for the past 12 months (TTM) = $455 million (sum of all FY1 values)
*   Sales per share (TTM) = $4.55 ($455 million in sales / 100 million shares outstanding)
*   P/S ratio = 2.2 ($10 share price / $4.55 sales per share)

Acme's P/S ratio for the current fiscal year would be calculated as follows:

*   Sales for the current fiscal year (FY2) = $520 million
*   Sales per share = $5.20
*   P/S ratio = $10 / $5.20 = 1.92

If Acme's peers in the same [sector](https://www.investopedia.com/ask/answers/05/industrysector.asp) have an average P/S ratio of 1.5 compared to Acme's 2.2, it suggests that Acme is valued higher. One reason for this could be the 14.3% revenue growth that Acme is expected to post in the current fiscal year ($520 million versus $455 million), which may be better than what is expected for its peers.

### Apple’s P/S Ratio: A Case Study

Take Apple's 2020 revenues of $274.5 billion as an example. With 16.53 billion in outstanding shares as of Sept. 30, 2021, Apple's sales per share are $16.60. With a stock price of $145, Apple's P/S ratio would be 8.73.

Compared to Google's P/S ratio of 6.29 and Microsoft's at 10.87, Apple and Google could be undervalued, or Microsoft might be overvalued.

## What Are the Benefits of the P/S Ratio for Investors?

The P/S ratio, also known as a sales multiple or revenue multiple, is a key analysis and valuation tool for investors and analysts. The ratio shows how much investors are willing to pay per dollar of sales. It can be calculated either by dividing the company’s market capitalization by its total sales over a designated period (usually twelve months) or on a per-share basis by dividing the stock price by sales per share. Like all ratios, the P/S ratio is most relevant when used to compare companies in the same sector. A low ratio may indicate the stock is undervalued, while a ratio that is significantly above the average may suggest overvaluation.

## What Are the Limitations of Using the P/S Ratio?

The P/S ratio doesn’t take into account whether the company makes any earnings or whether it will ever make earnings. Comparing companies in different industries can prove difficult as well. For example, companies that make video games will have different capabilities when it comes to turning sales into profits when compared to, say, grocery retailers. In addition, P/S ratios do not account for debt loads or the status of a company’s balance sheet.

## What Is the Enterprise Value-to-Sales (EV/Sales) Ratio?

Enterprise value-to-sales (EV/sales) measures how much it would cost to purchase a company's value in terms of its sales. A lower EV/sales multiple indicates that a company is a more attractive investment as it may be relatively undervalued. Essentially, it uses enterprise value and not market capitalization like the P/S ratio. Enterprise value adds debt and preferred shares to the market cap and subtracts cash. Since it does account for a company's debt load, the EV/Sales ratio is said to be superior, although it involves more steps and isn’t always as readily available.

## The Bottom Line

The Price-to-Sales (P/S) ratio is a valuable financial metric used to evaluate a company's valuation relative to its revenue. It empowers investors to compare stocks within the same sector, identifying potential undervaluations.

While helpful, the P/S ratio should be used alongside other financial metrics, given its limitations in accounting for debt and earnings. For a more comprehensive analysis, consider using the Enterprise Value-to-Sales (EV/Sales) ratio. Applying these tools effectively can aid both beginners and seasoned investors in making informed investment decisions.

> **Article Sources**
>
> 1.  U.S. Securities and Exchange Commission. "[Form 10-K Apple Inc. 2020](https://s2.q4cdn.com/470004039/files/doc_financials/2020/ar/_10-K-2020-%28As-Filed%29.pdf)."
>     
> 2.  Financial Times. "[AAPL](https://markets.ft.com/data/equities/tearsheet/summary?s=AAPL:NSQ)."
>     
> 3.  Yahoo Finance. "[Apple Inc. Quote History](https://finance.yahoo.com/quote/AAPL/history/)."
>     
> 4.  Macrotrends. "[Alphabet Price to Sales Ratio 2006-2020 | GOOGL](https://www.macrotrends.net/stocks/charts/GOOGL/alphabet/price-sales)."