Price/Sales Ratio (P/S Ratio)

The Price/Sales (P/S) ratio is a valuation metric that compares a company’s stock price to its revenues per share. It is calculated by dividing the company’s market capitalization by its total revenue or by dividing the stock price by the revenue per share. The P/S ratio helps investors evaluate how much they are paying for each dollar of a company’s sales. A lower P/S ratio suggests that a stock may be undervalued relative to its revenue, while a higher ratio indicates that the stock may be overvalued.

Example

A company with a market capitalization of $1 billion and annual revenues of $500 million has a P/S ratio of 2, meaning investors are paying $2 for every dollar of revenue.