Size and Price Metrics

    Price to Sales Ratio

    P/S Ratio

    The price to sales ratio compares a company's market cap with its annual revenue. It is the multiple you fall back on when there are no earnings to divide by.

    Formula

    P/S

    P/S = Market Cap ÷ Annual Sales

    Per share form

    P/S = Share Price ÷ Sales per Share

    Benchmark: Only meaningful against peers with similar margins; read it with net margin

    Reading the number

    Sales are harder to manipulate than profit and they exist even when the company is loss-making, so P/S survives where PE breaks. That is its whole appeal, and its whole weakness: a rupee of sales is worth very different amounts in different businesses. A company keeping 20 percent of every sale as profit deserves a far higher P/S than one keeping 2 percent.

    Use it in three situations: young or loss-making companies where PE is zero, cyclical companies at the bottom of the cycle when earnings have collapsed, and as a cross-check when earnings look unusually inflated. Always pair it with net profit margin, because P/S divided by net margin is just the PE ratio in disguise.

    Indian example

    Related ratios

    PE RatioNet Profit MarginEV to Sales

    Glossary terms

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