What Does Sales Per Share Mean?
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 shares outstanding.
It is also known as "revenue per share."
Sales Per Share Explained
The sales-per-share ratio is useful as a quick glance at a company's business activity strength. Obviously, 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 the year with an average of 10 million shares outstanding (average of beginning of year and end of 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 earnings per share number. An investor can make adjustments to the bottom line to calculate what are known as "core earnings" to obtain an improved view of the company's earnings situation. Sales per share, however, 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 the EPS number 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.