What is the P/S Ratio?
The Price-to-Sales (P/S) ratio compares a company's stock price (market capitalization) to its total revenue. It tells you how much investors are willing to pay for each dollar of sales.
Unlike P/E ratio which requires positive earnings, P/S works for any company with revenue, making it perfect for early-stage growth stocks, tech startups, and turnaround situations.
The P/S Formula
P/S Ratio = Market Cap ÷ Total Revenue
Or Per-Share Basis:
P/S = Stock Price ÷ Revenue Per Share
Example Calculation
- Market Cap: $10 billion
- Annual Revenue: $4 billion
- P/S Ratio: $10B ÷ $4B = 2.5
Investors are paying $2.50 for every $1 of sales.
Why P/S Ratio is Crucial
1. Works for Unprofitable Companies
Many high-growth companies are intentionally unprofitable (investing in growth). P/E ratio is useless here, but P/S works perfectly since revenue is positive.
2. Can't Be Negative
Unlike P/E (which becomes negative with losses), P/S is always positive. This makes comparison and ranking much easier.
3. Revenue is Harder to Manipulate
Earnings can be manipulated with accounting tricks (depreciation, stock-based comp, etc.). Revenue is much harder to fake, making P/S more reliable.
4. Great for Growth Stocks
Tech companies, biotech firms, and SaaS businesses often have high P/S ratios that reflect their growth potential, not current profitability.
How to Interpret P/S Values
P/S < 1.0 — Excellent Value
Very rare! Either a deep value play or a struggling company. Investigate why it's so cheap - could be a hidden gem or a bankruptcy risk.
P/S = 1-2 — Good Value
For established companies, this is attractive. For growth stocks, this is a bargain if revenue is growing 20%+.
P/S = 2-5 — Fair Value
Reasonable for most companies. Tech/SaaS companies at this level with 30%+ growth can be good investments.
P/S = 5-10 — Premium
Requires strong growth (40%+) and path to profitability. Common for cloud software and high-growth tech stocks.
P/S > 10 — Very Expensive
Only justified for exceptional companies with 50%+ revenue growth and clear market dominance. High risk of correction.
P/S Ratio by Industry
| Industry | Typical P/S Range | Notes |
|---|---|---|
| Retail | 0.3 - 0.8 | Low margins = low P/S |
| Automotive | 0.5 - 1.5 | Capital intensive |
| Healthcare | 1.5 - 3.0 | Depends on segment |
| Cloud Software (SaaS) | 10 - 20 | High margins, recurring revenue |
| Biotech (pre-revenue) | N/A | Use other metrics |
| E-commerce | 1 - 3 | Varies by business model |
Key Insight: Always compare P/S ratios within the same industry. A P/S of 10 might be expensive for retail but cheap for SaaS!
When to Use P/S Ratio
Best For
- • Unprofitable growth companies
- • Early-stage tech startups
- • Turnaround situations
- • Companies with volatile earnings
- • Revenue-focused growth stocks
- • SaaS and cloud companies
- • E-commerce platforms
Not Ideal For
- • Mature, profitable companies (use P/E)
- • Banks and financials (use P/B)
- • Companies with no revenue yet
- • Dividend-focused investing (use PEGY)
- • Asset-heavy industries (use P/B)
(Better alternatives exist)
Critical Limitations
- Ignores Profitability: A company can have great P/S but terrible margins. Always check profit margin and operating margin alongside P/S.
- Doesn't Show Cash Flow: High revenue means nothing if the company is burning cash. Check free cash flow and cash burn rate.
- Industry Variation: P/S of 2 is great for retail but terrible for SaaS. Always compare within the same sector.
- Revenue Quality Matters: One-time sales versus recurring revenue. SaaS recurring revenue justifies higher P/S than one-time product sales.
Use P/S With These Metrics
Gross Margin
High P/S + high margins (60%+) = sustainable growth. Low margins = value trap.
Revenue Growth Rate
P/S of 10 justified with 50%+ growth. With 10% growth, too expensive.
Cash Burn Rate
Low P/S means nothing if company runs out of cash before profitability.
Path to Profitability
Can the company become profitable by scaling? Or are losses structural?
Calculate P/S Ratios
Our calculator provides P/S ratio alongside PEG, PEGY, and other valuation metrics for complete analysis.
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