Professional Documents
Culture Documents
By
MARSHALL HARGRAVE
Reviewed by
DAVID KINDNESS
Updated Apr 9, 2021
TABLE OF CONTENTS
KEY TAKEAWAYS
The price-to-sales (P/S) ratio shows how much investors are willing to pay
per dollar of sales for a stock.
The P/S ratio is calculated by dividing the stock price by the underlying
company's sales per share.
A low ratio could imply the stock is undervalued, while a ratio that is
higher-than-average could indicate that the stock is overvalued.
One of the downsides of the P/S ratio is that it doesn’t take into account
whether the company makes any earnings or whether it will ever make
earnings.
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Price-to-Sales Ratio
Like all ratios, the P/S ratio is most relevant when used to compare companies in
the same sector. A low ratio may indicate the stock is undervalued, while a ratio
that is significantly above the average may suggest overvaluation.
The typical 12-month period used for sales in the P/S ratio is generally the past
four quarters (also called trailing 12 months or TTM), or the most recent or
current fiscal year (FY). A P/S ratio that is based on forecast sales for the current
year is called a forward P/S ratio.
As is the case with other ratios, the P/S ratio is of greatest value when it is used
for comparing companies within the same sector.
Sales for the past 12 months (TTM) = $455 million (sum of all FY1 values)
Sales per share (TTM) = $4.55 ($455 million in sales / 100 million shares
outstanding)
P/S ratio = 2.2 ($10 share price / $4.55 sales per share)
Acme’s P/S ratio for the current fiscal year would be calculated as follows:
Apple Example
Taking that a step further, consider Apple's fiscal 2019 revenues of $260.2
billion.1 With 17.53 billion in outstanding shares as of Sept. 30, 2021, Apple's
sales per share are $14.84.2 On that same day, its share price closed at $115.81,
giving the company a P/S ratio of 7.8.3
In that same period, at the end of Sept. 2020, Google traded with a P/S ratio of
6.29, and Microsoft at 10.92, suggesting that Apple and Google might be
undervalued or Microsoft might be overvalued.4 5
The EV/Sales ratio uses enterprise value and not market capitalization like the
P/S ratio. Enterprise value adds debt and preferred shares to the market cap and
subtracts cash. The EV/Sales ratio is said to be superior, although it involves
more steps and isn’t always as readily available.