P/S Ratio (Price-to-Sales Ratio)

The price-to-sales ratio, or P/S, compares a company's market value with its revenue. It is calculated as market capitalization divided by revenue over the last 12 months, or share price divided by revenue per share.

Example: a company has a market cap of $12 billion and annual revenue of $3 billion. Its P/S ratio is 4.

P/S is especially useful for young or fast-growing companies that are not yet profitable, where the P/E ratio cannot be calculated. Revenue is also more stable and less affected by accounting choices than earnings.

The main drawback is that the ratio ignores profitability and debt. A dollar of sales is worth much more at a company with high margins than at one with thin margins, so P/S values differ widely between industries. A grocery chain and a software company can have very different ratios for good reasons. Because debt is not considered, some analysts prefer the enterprise value-to-sales ratio.

P/S is most meaningful when comparing similar companies within the same industry, or a company with its own history.