What Is Sales Per Share?
Sales per share is a ratio that computes the total revenue earned per share over a designated period, whether quarterly, semi-annually, annually, or trailing twelve months (TTM). It is calculated by dividing total revenue by average total shares outstanding. It is also known as "revenue per share."
- Sales per share is a financial ratio that measures the total revenue earned per share over a specific time period.
- To calculate sales per share, divided total revenue by the average total shares outstanding.
- Sales per share provides a quick glance in identifying a company's productivity per share outstanding. The higher the sales-per-share ratio, the better a company is typically performing.
- Investors and analysts use sales per share to compare companies in a similar sector and to compare how the company is performing over different periods of time.
- Sales per share can be a limiting number as it only provides insight into a company's revenues, and does not take into consideration any debt or expenses on how those revenues were achieved.
Understanding Sales Per Share
The sales-per-share ratio is useful as a quick glance into a company's business activity strength. It helps identify a company's productivity per share. The higher the ratio, the stronger the business seems to be, at least in terms of the top line. If a company had $100 million in sales in one year with an average of 10 million shares outstanding (average of the beginning of the year and the end of the year), then the sales-per-share ratio would be 10x.
Sales per share can be used by investors to follow historical trends, compare with similar companies in the sector, and even plot the ratio on a business cycle chart, which could show whether the ratio was above, below, or where it should be in that particular part of the cycle.
Limitations of Sales Per Share
Sales per share is a pure ratio, that is, there are no extraneous effects or accounting idiosyncrasies that can affect the number. For the earnings-per-share (EPS) ratio, an investor can make adjustments to the bottom line to calculate what is known as "core earnings" to obtain an improved view of the company's earnings situation. Sales per share, on the other hand, which by definition ignores everything below the top line, has nothing to say about a company's EBIT or net profit margins.
The sales-per-share ratio is somewhat meaningless without EPS to assess the profitability of the firm. If sales per share were to jump from one year to the next, one may conclude that the company was performing better. That may not be the case if the company made a large acquisition by increasing its debt loads, or if the additional sales required marketing and other operating expenses that lowered overall EBIT margins.
For another scenario, imagine that the company bought back and retired some outstanding shares to reduce the share count, but the repurchase was executed at a moment when the stock price was overvalued. The sales-per-share ratio, with a lower denominator, would be higher, but the capital allocation decision of management would have to be questioned by shareholders. Moreover, if sales per share as a ratio could be subject to manipulation by management to meet a target in the executive compensation plan, the ratio would have even less utility.