Price-to-Sales (P/S) Ratio: Definition and Use Cases
Price-to-Sales (P/S) compares market capitalization to revenue. Useful for early-stage or low-profit companies where earnings are volatile.
Formula
Use trailing twelve months (TTM) revenue or forward revenue estimates consistently across peers.
Notes
- Useful for valuing businesses before stable profits (e.g., early growth companies).
- P/S ignores profitability differences — combine with margins or conversion metrics.
- Lower P/S can indicate relative cheapness, but must be compared to peers and growth expectations.
Why it matters
P/S is a valuable metric for assessing value when profits are unpredictable or negative. It's harder to manipulate than earnings-based metrics since revenue recognition is more standardized, making it useful for early-stage companies and relative valuation screens.