The P/S ratio measures how much investors pay for each dollar of a company's revenue, useful for valuing unprofitable companies.
The Price-to-Sales ratio compares a company's market capitalization to its total revenue. Unlike P/E ratio, it works for companies without profits, making it valuable for evaluating early-stage or rapidly growing companies. The metric shows how efficiently a company converts revenue into market value and helps identify overvalued or undervalued stocks based on their sales generation.
A company with $20 billion market cap and $10 billion in annual revenue has a P/S ratio of 20 / 10 = 2.0x. Investors pay $2 for every $1 of sales.
A P/S ratio above 5-10x indicates investors expect high profit margins or significant revenue growth, common in software and technology companies.
A P/S ratio below 1-2x might suggest undervaluation or concerns about profitability, often seen in retail or commodity businesses.
The ideal P/S ratio varies widely by industry. Software companies may justify P/S of 10-20x, while retailers typically trade at P/S below 1.0x.
