Price-To-Sales Ratio - PSR

Definition of 'Price-To-Sales Ratio - PSR'


A valuation ratio that compares a company’s stock price to its revenues. The price-to-sales ratio is an indicator of the value placed on each dollar of a company’s sales or revenues. It can be calculated either by dividing the company’s market capitalization by its total sales over a 12-month period, or on a per-share basis by dividing the stock price by sales per share for a 12-month period. Like all ratios, the price-to-sales ratio is most relevant when used to compare companies in the same sector. A low ratio may indicate possible undervaluation, while a ratio that is significantly above the average may suggest overvaluation. Abbreviated as the P/S ratio or PSR, this ratio is also known as a “sales multiple” or “revenue multiple.”

Investopedia explains 'Price-To-Sales Ratio - PSR'


The 12-month period used for sales in the price-to-sales ratio is generally the past four quarters (also called trailing 12 months or ttm), or the most recent or current fiscal year. A price-to-sales ratio that is based on forecast sales for the current year is called a forward ratio.

Consider the quarterly sales for Acme Co. shown in the table below. The sales for fiscal year 1 (FY1) are actual sales, while sales for FY2 are analysts’ average forecasts (assume that we are currently in Q1 of FY2). Acme has 100 million shares outstanding, with the shares presently trading at $10.  

Acme Co. Quarterly Sales

At the present time, Acme’s P/S ratio on a trailing 12-month basis would be calculated as follows –

  • Sales for past 12 months (ttm) = $455 million (sum of all FY1 values)
  • Sales per share (ttm) = $4.55
  • P/S ratio = $10 / $4.55 = 2.20
Acme’s P/S ratio for the current fiscal year would be calculated as follows –

  • Sales for current fiscal year (FY2) = $520 million
  • Sales per share = $5.20
  • P/S ratio = $10 / $5.20 = 1.92
If Acme’s peers – which we assume are based in the same sector and are of similar size in terms of market capitalization – are trading at an average P/S ratio (ttm) of 1.5, compared with Acme’s 2.2, it suggests a premium valuation for the company. One reason for this could be the 14.2% revenue growth that Acme is expected to post in the current fiscal year ($520 million vs. $455 million), which may be better than what's expected for its peers.

As with any other ratio, the P/S ratio cannot be viewed in isolation, since it only presents a very narrow view of a company or stock. This ratio is particularly useful for comparing the valuation of early-stage companies that have revenues but are not yet profitable.



comments powered by Disqus
Hot Definitions
  1. Oil Reserves

    An estimate of the amount of crude oil located in a particular economic region. Oil reserves must have the potential of being extracted under current technological constraints. For example, if oil pools are located at unattainable depths, they would not be considered part of the nation's reserves.
  2. Joint Venture - JV

    A business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task. This task can be a new project or any other business activity. In a joint venture (JV), each of the participants is responsible for profits, losses and costs associated with it.
  3. Aggregate Risk

    The exposure of a bank, financial institution, or any type of major investor to foreign exchange contracts - both spot and forward - from a single counterparty or client. Aggregate risk in forex may also be defined as the total exposure of an entity to changes or fluctuations in currency rates.
  4. Organic Growth

    The growth rate that a company can achieve by increasing output and enhancing sales. This excludes any profits or growth acquired from takeovers, acquisitions or mergers. Takeovers, acquisitions and mergers do not bring about profits generated within the company, and are therefore not considered organic.
  5. Family Limited Partnership - FLP

    A type of partnership designed to centralize family business or investment accounts. FLPs pool together a family's assets into one single family-owned business partnership that family members own shares of. FLPs are frequently used as an estate tax minimization strategy, as shares in the FLP can be transferred between generations, at lower taxation rates than would be applied to the partnership's holdings.
  6. Yield Burning

    The illegal practice of underwriters marking up the prices on bonds for the purpose of reducing the yield on the bond. This practice, referred to as "burning the yield," is done after the bond is placed in escrow for an investor who is awaiting repayment.
Trading Center