Investing for Beginners .EU, investing

investingforbeginners.eu Just as a cautious businessman avoids investing all his capital in one concern, so wisdom would probably admonish us also not to anticipate all our happiness from one quarter alone.
Sigmund Freud

Investment Dictionary


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P/S Ratio

Price to Sales Ratio

 

P/S ratio shows the price of the stock compared to its sales. This ratio historically was quiet popular, but now EV/S ratio, which is more correct methodically, is used. 

 

Formula (Calculation): 

P/S = share price / sales per share

 

Simplified calculation (may be applied if there is only one class of shares): 

P/S = market capitalization / sales of the company 

 

It is more simple to calculate P/S than EV/S, but P/S is incorrect methodically because sales (S) is an index of the firm, but share price (P) is an equity ratio. The difference might be significant if company has a lot of debts.

 

If you want to find cheap stocks that would be good investments, you have to calculate more valuation multiples. You can’t rely on one ratio (P/S) when making investment decision. 

 

 






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