Price-to-Sales (P/S) ratio measures how much investors are willing to pay for each dollar of a company’s revenue. It is commonly calculated as market capitalization divided by trailing twelve months (TTM) revenue, or as price per share divided by revenue per share. Both approaches relate stock price to sales rather than to earnings.
How it's used: Analysts compare P/S across companies in the same industry, or track changes over time for a given company. A lower P/S can indicate a lower valuation relative to revenue, while a higher P/S can reflect growth expectations or stronger market positioning. The metric is often more informative for firms with irregular or negative earnings, where earnings-based measures are less meaningful. P/S is also used in conjunction with other multiples to gauge relative value and to identify outliers within a sector.
Context and caveats: P/S does not account for profitability or cost structure, so two firms with similar revenue can have very different margins and cash flows. Revenue quality, accounting methods, and growth trajectories affect the ratio. Industry norms vary; software and other scalable businesses often carry higher P/S values than asset-heavy or mature industries. For a more complete view, analysts may compare P/S with enterprise value multiples (EV/Revenue) and profitability metrics.
Company X has a market cap of $50 billion and annual revenue of $10 billion, yielding a P/S ratio of 5.
Price-to-Earnings (P/E) ratio · Price-to-Book (P/B) ratio · Enterprise Value to Revenue (EV/Revenue) · Market capitalization · Revenue