Price-to-Sales RatioP/S
The price-to-sales ratio is a company’s market capitalisation divided by its annual revenue. It is used for companies without profits, but ignores costs, so two companies with the same ratio can have very different margins.
The price-to-sales ratio values a company against its revenue rather than its profit. That makes it usable for young or loss-making firms, but because it ignores costs, it says nothing on its own about how much of each sale the company keeps.
- Category
- Fundamentals and Macroeconomics
- Reading time
- 3 min
- Also called
- Price/sales ratio, Sales multiple, Revenue multiple
- Updated
Price-to-sales in plain words
P/S divides a company's market value by its revenue; because it ignores profit, it is handy for companies that aren't profitable yet.1
Its main use is valuing companies whose earnings are negative or swing a lot.2
Sales are only the first line — the income statement also shows what it cost to earn them.3 Two firms with the same P/S can have very different margins.
How to calculate and use P/S
Find market cap
Multiply share price by shares outstanding.
Find annual revenue
Use the last four quarters or the latest fiscal year.
Divide
P/S is market capitalization divided by revenue.1
Compare within the industry
Compare within an industry, since typical ratios vary widely between sectors.1
Check margins
Check the costs of earning those sales.3
Watch for traps
Be wary: a business can be deteriorating before it shows up in revenue, earnings or book value.4
Worked examples
Example 1 — Basic ratio
P/S of 3A hypothetical company is worth $600 million and had $200 million of revenue.
| Market cap | $600m |
| Revenue | $200m |
| P/S | 3× |
Dividing market capitalization by revenue gives 3, which works even though the firm has not made a profit.1
Example 2 — Same P/S, different margins
Margins differTwo hypothetical firms both trade at 2× sales; one keeps 20% as profit, the other 2%.
| Firm A net margin | 20% |
| Firm B net margin | 2% |
P/S hides this, because it ignores the costs of earning the revenue.3
Example 3 — Cross-industry
Compare peersA hypothetical grocer trades at 0.4× sales and a software firm at 8×.
| Grocer P/S | 0.4× |
| Software P/S | 8× |
Neither ratio is automatically cheap or expensive — typical levels differ a lot by industry.1
P/S vs P/E
| Aspect | Price-to-sales | Price-to-earnings |
|---|---|---|
| Denominator | Revenue | Earnings |
| Usable with losses | Yes | No |
| Accounts for costs | No | Yes |
| Typical use | Early-stage, cyclical firms | Profitable, stable firms |
Where P/S is used
Loss-making growth firms
Value companies with no Earnings yet.
Cyclical lows
Revenue falls less than profit in a Recession.
Peer screening
Rank firms by Market Capitalisation per unit of sales.
Cross-check
Pair with the Price-to-Earnings Ratio for a fuller view.
Advantages and disadvantages
Advantages
- Works when earnings are negative.
- Revenue is harder to manipulate than profit.
- Simple to calculate.
- Less volatile than earnings-based ratios.
Disadvantages
- Ignores costs and margins.
- Ignores debt, unlike enterprise-value measures.
- Normal ranges vary widely by industry.
- Revenue recognition rules differ by country and standard.
Going deeper
Read as far as you need. Each level builds on the one before it.
Common mistakes
Treating low P/S as cheap
Thin margins can justify it.
Comparing across industries
Ranges differ widely.
Ignoring debt
Heavily indebted firms look cheaper than they are.
Mixing revenue periods
Use the same period for every company.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- P/S is market cap divided by annual revenue.
- It works for companies without profits.
- It ignores costs and margins.
- Compare only within the same industry.
- Use it alongside profit-based ratios.
Frequently asked questions
What is a good P/S ratio?
Why do growth investors use P/S?
Is P/S the same as EV/sales?
Further learning
- Price-to-Earnings Ratio
The profit-based alternative.
- Market Capitalisation
The numerator of P/S.
- Profit and Loss
How costs turn revenue into profit.
- Fundamental Analysis
The wider valuation toolkit.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- FINRA. Evaluating Stocks (opens in a new tab) Checked .
- Charles Schwab. What Is the P/E Ratio? Why Investors Use It (opens in a new tab) Checked .
- SEC. Beginners' Guide to Financial Statements (opens in a new tab) Checked .
- FINRA. Defining the Value of an Investment (opens in a new tab) Checked .
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.