Our P/S Ratio Calculator helps you calculate the Price-to-Sales ratio of stocks. You can choose between calculating using stock price and revenue per share or market capitalization and total revenue. This allows you to make informed decisions and better understand the value of your investments. Use our tool to optimize your investment strategies.
P/S Ratio Calculator
P/S Ratio Calculation: Formula and Example
There are two methods for calculating the Price-to-Sales ratio (P/S ratio):
Stock Price and Revenue per Share:
\(\text{P/S Ratio} = \frac{\text{Stock Price}}{\text{Revenue per Share}}\)
Example: If the stock price is $50 and the revenue per share is $10, the P/S ratio is: 5
Market Capitalization and Total Revenue:
\(\text{P/S Ratio} = \frac{\text{Market Capitalization}}{\text{Total Revenue}}\)
Example: If the market capitalization is $500,000,000 and the total revenue is $100,000,000, the P/S ratio is: 5
Definition of Price-to-Sales Ratio
The Price-to-Sales ratio (P/S ratio) is a financial metric that compares a company’s current stock price to its revenue per share. It serves as an indicator for investors to assess a stock’s valuation.
A low P/S ratio may indicate that a stock is undervalued, while a high P/S ratio could suggest that a stock is overvalued. The P/S ratio is calculated by dividing the current stock price by the revenue per share.
The formula is:
\(\text{P/S Ratio} = \frac{\text{Stock Price}}{\text{Revenue per Share}}\)The P/S ratio should always be viewed in the context of the industry and the overall market, as different industries may have varying average P/S ratios.
When the P/S Ratio is Preferable to the P/E Ratio
The Price-to-Sales ratio (P/S ratio) is especially useful when evaluating growth stocks that have yet to generate profits.
For companies in an early growth stage that have high revenues but no profits, the Price-to-Earnings ratio (P/E ratio) is either inapplicable or not informative. Since the P/E ratio incorporates earnings per share in its calculation, it cannot be used for companies without profits, or it may display extremely high and misleading values.
The P/S ratio, however, uses revenue, which is present even in fast-growing companies that are not yet profitable. It allows investors to assess a company’s market value relative to its revenue. This is particularly important when analyzing growth stocks, as these companies often generate high revenues while reinvesting heavily in growth, and therefore, do not yet show profits.
Overall, the P/S ratio provides a better foundation for evaluating and comparing growth stocks in their growth and investment phase.
Significance of Different P/S Ratios
This table provides a more comprehensive categorization of the Price-to-Sales ratio (P/S ratio) and corresponding evaluations that investors can use as guidance.
| P/S Ratio Category | Assessment |
|---|---|
| P/S < 1 | Very Low: Could indicate an undervalued stock or a company with low margins or challenges. Requires further analysis. |
| P/S 1 – 2 | Low: May represent a good buying opportunity, especially if the company shows solid revenue growth. |
| P/S 2 – 3 | Moderate: Typically reflects the market average and is considered fairly valued. |
| P/S 3 – 5 | Elevated: Could indicate an overvalued stock, particularly if revenue growth is not strong. Caution is advised. |
| P/S 5 – 10 | High: Significantly high valuation, often justified only by extremely strong revenue growth and high future expectations. |
| P/S 10 – 20 | Very High: High expectations for future growth. Great caution is advised, as the risk of overvaluation is present. |
| P/S > 20 | Extremely High: Usually a sign of speculative bubble or extremely optimistic expectations. Exercise extreme caution. |
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