price-to-sales ratio

Fin

the ratio of the value of all of a company’s stock to its sales for the previous twelve months, a way of measuring the relative value of a share when compared with others.

EXAMPLE

The P/S ratio is obtained by dividing the market capitalization by the latest published annual sales figure. So a company with a capitalization of $1 billion and sales of $3 billion would have a P/S ratio of 0.33.

     P/S will vary with the type of industry. You would expect, for example, that many retailers and other large-scale distributors of goods would have very high sales in relation to their market capitalizations—in other words, a very low P/S. Equally, manufacturers of high-value items would generally have much lower sales figures and thus higher P/S ratios.

     A company with a lower P/S is cheaper than one with a higher ratio, particularly if they are in the same sector so that a direct comparison is more appropriate. It means that each share of the lower P/S company is buying more of its sales than those of the higher P/S company.

     It is important to note that a share which is cheaper only on P/S grounds is not necessarily the more attractive share. There will frequently be reasons why it has a lower ratio than another similar company, most commonly because it is less profitable.