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.<\/p>" } } , { "@type": "Question", "name": "What Are the Limitations of Using the P/S Ratio?", "acceptedAnswer": { "@type": "Answer", "text": "
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.<\/p>" } } , { "@type": "Question", "name": "What Is the Enterprise Value-to-Sales (EV/Sales) Ratio?", "acceptedAnswer": { "@type": "Answer", "text": "
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.<\/p>" } } ] } ] } ]