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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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