What is Price to Sales ratio?
Price to Sales ratio (or P/S ratio or just PSR) is a tool for valuation and comparison of stocks. It is calculated by dividing company' market capitalization with company's revenue in a given period (usually the most recent fiscal year). We could interpret it as how many dollars you have to pay for a single dollar of revenue.
PSR can vary a lot among sectors, therefore it is useful in comparing stocks from the same sectors. The lower PSR is better. For example, stock A trading at 100$ and having 10$ revenues yields PSR=100/10=10. A stock B trading at 100$ and having 20$ revenues yields PSR=100/20=5. Therefore, other parameters being equal, stock B is a better investing opportunity.
As with other ratios this one could be compared with projections and historical values.
PSR can vary a lot among sectors, therefore it is useful in comparing stocks from the same sectors. The lower PSR is better. For example, stock A trading at 100$ and having 10$ revenues yields PSR=100/10=10. A stock B trading at 100$ and having 20$ revenues yields PSR=100/20=5. Therefore, other parameters being equal, stock B is a better investing opportunity.
As with other ratios this one could be compared with projections and historical values.
Labels: ratio, valuing stocks
posted by Zoran Maksimovic at
9:45 AM
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