## What is the 'Price-To-Sales Ratio - PSR'

The price-to-sales ratio is 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.

Abbreviated as the P/S ratio or PSR, the price-to-sales ratio is also known as a “sales multiple” or “revenue multiple.”

Next Up

## BREAKING DOWN '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.

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.

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.

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.

RELATED TERMS
1. ### Key Ratio

Key ratios are the main mathematical ratios that illustrate and ...
2. ### Combined Ratio

Combined ratio is a measure of profitability used by an insurance ...
3. ### Efficiency Ratio

The efficiency ratio is used to analyze how well a company utilizes ...
4. ### Cash Ratio

The cash ratio is the ratio of a company's total cash and cash ...
5. ### Debt Ratio

The debt ratio is a financial ratio that measures the extent ...
6. ### Stock Market Capitalization To ...

The stock market capitalization to GDP ratio is used to determine ...
Related Articles
1. Investing

### Is Amazon Overvalued? Compare Price-To-Sales Ratios

The price-to-earnings (P/E) ratio is the most common and easiest valuation metric to calculate. But what happens when earnings are negative?
2. Investing

### 5 must-have metrics for value investors

In this article, we outline the five ratios that can help value investors find the most undervalued stocks in the market.
3. Investing

### Payout Ratio vs. Retention Ratio: When to Use Which

The payback ratio and retention ratio collect different information and are useful in different situations.
4. Investing

### 6 Basic Financial Ratios And What They Reveal

These formulas can help you pick better stocks for your portfolio once you learn how to use them.
5. Investing

### The 4 basic elements of stock value

Investors use these four measures to determine a stock's worth. Find out how to use them.
RELATED FAQS
1. ### What is considered a favorable price to sales ratio?

Understand the price to sales (P/S) ratio and learn what market analysts typically consider to be a favorable or excellent ... Read Answer >>
2. ### What is considered a good PEG (price to earnings growth) ratio?

Learn about the price/earnings to growth (PEG) ratio and understand what investors and market analysts consider a good ratio ... Read Answer >>
3. ### How can a company quickly increase its liquidity ratio?

Discover what high and low values in the liquidity ratio mean and what steps companies can take to improve liquidity ratios ... Read Answer >>
4. ### What is the formula for calculating the current ratio?

Find out what makes up the current ratio, how to calculate it, and what the result can tell you about a potential investment. Read Answer >>
5. ### How does ratio analysis make it easier to compare different companies?

Learn what ratio analysis is, how investors can compare companies within the same sector using ratio analysis and how ratios ... Read Answer >>