Valuation
Price-to-sales
Also called P/S
Market value divided by annual revenue — a multiple that still works when there are no profits.
How it works
P/S is used for companies that are growing fast and not yet profitable, where earnings-based multiples cannot be computed.
It is only comparable between companies with similar margins. A dollar of revenue in a business earning 40% margins is worth many times a dollar in one earning 3%.
Where it misleads people
Revenue is the easiest line to grow and the least meaningful. A company can buy revenue by selling below cost, and P/S will improve while the business gets worse.
Formula
P/S = market capitalisation ÷ revenueRelated terms
- Gross marginWhat proportion of revenue is left after the direct cost of producing what was sold.
- RevenueThe total value of goods and services a company sold in a period, before any costs.
- EV/SalesEnterprise value divided by revenue — price-to-sales corrected for debt and cash.
- Price-to-bookMarket value divided by the accounting value of the company’s net assets.
More in Valuation
Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.