1. What is Price to Sales Ratio?

The Price to Sales (PS) ratio is a valuation metric that compares a company's market capitalization to its annual sales revenue. It indicates how much investors are willing to pay per unit of sales, providing insight into a company's valuation relative to its revenue generation.

2. How Does the Calculator Work?

The calculator uses the Price to Sales ratio formula:

Where:

• \( PS \) — Price to Sales ratio (unitless)
• \( \text{Market Cap} \) — Market Capitalization (currency)
• \( \text{Annual Sales} \) — Annual Sales Revenue (currency/year)

Explanation: The PS ratio measures how much the market values every dollar of a company's sales. A lower ratio may indicate potential undervaluation, while a higher ratio may suggest overvaluation.

3. Importance of PS Ratio

Details: The PS ratio is particularly useful for comparing companies within the same industry, evaluating companies with negative earnings, and assessing growth companies that may not yet be profitable but have strong revenue growth.

4. Using the Calculator

Tips: Enter market capitalization and annual sales in the same currency units. Both values must be positive numbers. The calculator will compute the PS ratio as a unitless value.

5. Frequently Asked Questions (FAQ)

Q1: What is considered a good PS ratio?
A: There's no universal "good" PS ratio as it varies by industry. Generally, ratios below 1-2 may indicate undervaluation, while ratios above 5-10 may suggest overvaluation, but industry comparisons are essential.

Q2: How does PS ratio differ from P/E ratio?
A: PS ratio uses sales revenue as the denominator, while P/E ratio uses earnings. PS is useful for companies with no earnings or inconsistent profits, while P/E focuses on profitability.

Q3: What are the limitations of PS ratio?
A: PS ratio doesn't account for debt levels, profit margins, or differences in business models. Companies with high sales but low margins may have misleading PS ratios.

Q4: Should PS ratio be used alone for investment decisions?
A: No, PS ratio should be used in conjunction with other financial metrics like P/E ratio, profit margins, debt levels, and growth rates for comprehensive analysis.

Q5: How does PS ratio vary across industries?
A: High-margin industries (like software) typically have higher PS ratios, while low-margin industries (like retail) usually have lower PS ratios. Always compare within the same industry.