Price to Sales Ratio Analysis - The Strategic CFO®

Price to Sales Ratio Analysis

Other Category: Accounting

July 24, 2013
Dan
analysis, benchmark, financial ratio, investor, price, price to sales ratio analysis, Sales, value

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.
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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.

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