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
Glossary terms
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