P/S — Price-to-Sales Ratio
DeepScreen explains P/S as follows: P/S values a company against revenue and is useful when earnings are small or negative. It must be read with margins because sales without profit can destroy value.
Formula
Market capitalisation ÷ annual revenue
Illustrative example
A market value of 600 million divided by annual revenue of 300 million gives P/S of 2x. Two companies at 2x can have very different profit margins.
Educational example; these are not reported company figures.
How to interpret it
- Compare P/S only among businesses with similar margins.
- A falling P/S can result from faster sales or a falling share price.
Limitations
- Revenue quality and recurring sales differ.
- P/S ignores debt and profitability.
Frequently asked questions
- What is P/S?
- P/S values a company against revenue and is useful when earnings are small or negative. It must be read with margins because sales without profit can destroy value.
- How is P/S calculated?
- Market capitalisation ÷ annual revenue
- What should investors watch for with P/S?
- Revenue quality and recurring sales differ. P/S ignores debt and profitability.
. Educational analytical content, not investment advice.