Price to Sales Ratio Analysis

Price to Sales Ratio Analysis

See Also:
Price Earnings Ratio
Price to Book Value Ratio
Financial Ratios

Price to Sales Ratio Analysis Definition

Price to sales ratio (PSR ratio) indicates how much investor paid for a share compared to the sales a company generated per share. It measures the value placed on sales by the market. A higher ratio means that the market is willing to pay for each dollar of annual sales. In general, the lower the P/S, the better the value is. However, the value of the ratio varies across industries. A better benchmark is to compare with industry average.
[box](NOTE: Want the Pricing for Profit Inspection Guide? It walks you through a step-by-step process to maximizing your profits on each sale. Get it here!)[/box]

Price to Sales Ratio Formula

Price to sales ratio = Market price per share ÷ Sales per share
Or = Market Cap ÷ total sales

Price to Sales Ratio Calculation

Example: assume $20 in market price per share and $5 in sales per share.
Price to sales ratio = 20 / 5 = 4
This means that investors pay $4 for every dollar of sales that a company generates.

Applications

Price to sales ratio values a stock relative to its historical performance, market competitors or general market. In general, a low price to sales ratio means a good investment because investors are paying less for each unit of sales. However, price to sales sometimes provide very limited information because it does not take into account any expenses or debt and a company with high sales maybe unprofitable.

Resources

For statistical information about industry financial ratios, please click the following website: www.bizstats.com and www.valueline.com.
To learn how to price for profit, download our Pricing for Profit Inspection Guide.
Price to Sales Ratio Analysis
[box]Strategic CFO Lab Member Extra
Access your Strategic Pricing Model Execution Plan in SCFO Lab. The step-by-step plan to set your prices to maximize profits.
Click here to access your Execution Plan. Not a Lab Member?
Click here to learn more about SCFO Labs[/box]
Price to Sales Ratio Analysis

ARTICLES YOU MIGHT LIKE

Does your Accounting Department Produce Net Income?

Coaching the Entrepreneur: Learn how to know what you don’t know. How much should I spend on accounting for my company?     I have been in the accounting profession for 32 years, and for the last 6 years, I’ve owned my own consulting firm to assist companies with accounting challenges. There is one common theme that I

Read More »

Is Mexico the New China?

In the wake of the COVID-19 pandemic and escalating tensions with China, American companies are actively seeking alternatives to mitigate their supply chain risks and reduce dependence on Chinese manufacturing. Nearshoring, the process of relocating operations closer to home, has emerged as an explosive opportunity for American and Mexican companies to collaborate like never before.

Read More »

JOIN OUR NEXT SERIES

Financial Leadership Workshop

MARCH 28TH-31ST 2022

THE ART OF THE CFO®

Financial Leadership Workshop

Days
Hours
Min

August 7-10th, 2023

SHARE THIS ARTICLE
WIKI CFO® - Browse hundreds of articles
Skip to content