Price-to-Sales (P/S)
Measures the market value investors assign to each unit of company revenue.
Formula
Price-to-Sales = Market Capitalization / Revenue
Worked exampleA $50 billion market capitalization divided by $10 billion of revenue gives a P/S ratio of 5x.
Calculation steps
- Find market capitalization: $50 billion.
- Use revenue for the matching annual or trailing period: $10 billion.
- Divide $50 billion by $10 billion to get 5x.
How to interpret it
A lower P/S can look cheaper, but margins determine how much of that revenue may eventually become profit or cash.
Industry context
High-margin software firms often support higher P/S multiples than retailers, distributors, or other low-margin businesses.
Common mistakes
- Do not compare companies with very different margins.
- Keep currencies and reporting periods consistent.
- Remember that revenue growth can be acquired rather than organic.