Price-to-Sales (P/S) Ratio is a number that is helpful for recognizing a company’s total value and comparing it to the actual revenue being generated by that business. It is a ratio that allows investors to compare the value of stocks, while also determining whether stocks are priced properly at all. There are two common ways that P/S ratio is calculated and they include:
The P/S ratio can be most helpful for comparing companies within one industry, considering the fact that “normal” levels vary between different sectors. For this reason, P/S ratio should never be compared between businesses in different niches.
Calculating this figure can also be beneficial for helping investors understand the price that other investors would be willing to pay for a single share. The P/S ratio allows investors to distinguish stocks with greater growth potential because those with ratios lower than comparable companies in the same industry are identified as worth investing in. P/S ratio most helpful for evaluating younger companies that may not generate the same profits every single year.