Glossary
Price-to-sales ratio (P/S)
Market capitalization divided by annual revenue: what investors pay per dollar of sales, often used for companies without profits.
On this page
The price-to-sales ratio (P/S) divides a company's market value by its revenue over the last twelve months. It shows how much investors pay for each dollar of sales. Because revenue is positive even when a company loses money, P/S is a go-to measure for young, unprofitable or temporarily depressed businesses where the P/E ratio does not work.
How it works
That last point is the key to reading P/S: the right multiple depends on how much of each sales dollar becomes profit. A company with a 25% Net profit margin at a P/S of 5 trades at roughly 20 times earnings (5 ÷ 0.25); one with a 2% margin at the same P/S trades at about 250 times earnings.
What to watch for
- Margins matter. Comparing P/S across industries with very different margins is misleading. Compare within a Sector, or alongside margin data.
- Debt is ignored. Market cap counts only equity. Two firms with the same P/S but very different debt loads are not equally cheap. The enterprise-value-to-sales ratio, which adds debt and subtracts cash, fixes this.
- Revenue quality. One-time contracts, acquisitions or aggressive revenue recognition can inflate the denominator.
- Growth. A high P/S is easier to justify when revenue is growing fast and margins are expected to widen, and harder when either assumption fails.