Price–sales ratio


Price–sales ratio, P/S ratio, or PSR, is a valuation metric for stocks. It is calculated by dividing the company's market capitalization by the revenue in the most recent year; or, equivalently, divide the per-share stock price by the per-share revenue. Also, justified p/s is calculated as /).
Unless otherwise stated, P/S is "trailing twelve months", the reported sales for the four previous quarters, although of course longer time periods can be examined.
The smaller this ratio is usually thought to be a better investment since the investor is paying less for each unit of sales. However, sales do not reveal the whole picture, as the company may be unprofitable with a low P/S ratio. Because of the limitations, this ratio is usually used only for unprofitable companies, since they don't have a price–earnings ratio. The metric can be used to determine the value of a stock relative to its past performance. It may also be used to determine relative valuation of a sector or the market as a whole.
PSRs vary greatly from sector to sector, so they are most useful in comparing similar stocks within a sector or sub-sector.
Comparing P/S ratios carries the implicit assumption that all firms in the comparison have an identical capital structure. This is always a problematic assumption, but even more so when the assumption is made between industries, since industries often have vastly different typical capital structures. This is the reason why P/S ratios across industries vary widely.