P/S Ratio: Price vs Sales
Sometimes companies don't have earnings (yet). That's where P/S comes in—it values companies based on revenue.
The Formula
P/S Ratio = Stock Price ÷ Sales Per Share
Or equivalently:
P/S Ratio = Market Cap ÷ Total Revenue
Buying a Food Truck
Two food trucks for sale:
Truck A:
- Revenue: $200,000/year
- Price: $100,000
- P/S = 0.5
Truck B:
- Revenue: $200,000/year
- Price: $400,000
- P/S = 2.0
Same revenue, but Truck A costs half as much. All else equal, Truck A is the better deal.
Why P/S Matters
1. Works for Unprofitable Companies
Many growth companies reinvest all revenue into expansion. No profits = no P/E. But P/S still works.
2. Revenue is Harder to Manipulate
Earnings can be adjusted through accounting. Revenue is more straightforward.
3. Shows What You're Paying for Growth
High-growth companies often trade at high P/S because investors expect revenue to keep growing.
What P/S Tells You
| P/S Level | General Interpretation |
|---|---|
| Below 1 | Very cheap (paying less than 1 year's revenue) |
| 1-2 | Cheap to fair |
| 2-5 | Fair for growing companies |
| 5-10 | Expensive (high growth expected) |
| 10+ | Very expensive (exceptional growth expected) |
Key Takeaways
- P/S = Price ÷ Sales (Revenue)
- Works even when companies aren't profitable
- Lower P/S generally means cheaper
- Must consider profit margins alongside P/S
The Margin Connection
Here's the catch: revenue isn't profit.
A company with $1 billion in revenue and 5% margins earns $50 million. A company with $1 billion in revenue and 20% margins earns $200 million.
Same revenue, 4x the profit!
Key insight: Low P/S + high margins = potentially great value Low P/S + low margins = might be cheap for a reason
P/S and Margins Together
When comparing P/S, always check profit margins:
| Company | P/S | Net Margin | Effective "P/E" |
|---|---|---|---|
| A | 2.0 | 20% | 10 |
| B | 2.0 | 5% | 40 |
Same P/S, but Company A is much cheaper when you account for profitability.
P/S by Sector
| Sector | Typical P/S | Why |
|---|---|---|
| Software (SaaS) | 5-15 | High margins, recurring revenue |
| E-commerce | 1-3 | Lower margins, high volume |
| Retail | 0.3-1.0 | Very low margins |
| Manufacturing | 0.5-2.0 | Moderate margins |
| Financials | 2-5 | Revenue = interest income |
When to Use P/S
Best for:
- Unprofitable growth companies — No earnings to use
- Comparing similar companies — Same industry, similar margins
- Cyclical companies — Earnings fluctuate, revenue more stable
- Turnaround situations — Losses today, potential profits tomorrow
Less useful for:
- Highly profitable companies — P/E is more relevant
- Cross-sector comparisons — Margins vary too much
- Financial companies — Revenue definition is tricky
P/S Limitations
1. Ignores Profitability
A company can have great revenue but terrible margins.
2. Doesn't Account for Debt
Two companies with same P/S but different debt levels aren't equal.
3. Revenue Quality Varies
One-time sales vs. recurring subscriptions aren't the same.
4. Sector-Specific
A P/S of 5 is cheap for software but expensive for retail.
P/S Traps
- Buying just because P/S is low (check margins!)
- Comparing P/S across different industries
- Ignoring that revenue might not turn into profit
- Using P/S for profitable companies where P/E works better
The Valuation Toolkit
You now have three key valuation metrics:
| Metric | Best For | Limitation |
|---|---|---|
| P/E | Profitable companies | Doesn't work without earnings |
| P/B | Asset-heavy companies | Ignores earning power |
| P/S | Growth/unprofitable companies | Ignores profitability |
Smart investors use all three (where applicable) to get a complete picture.
Next up: How ShareValue.ai combines these metrics into the Valuation Score.