Price to Sales ratio

Price to Sales ratio


P/S = Market price of common stock / Sales per share


Sales per share equals net annual sales (or revenues) divided by the number of common shares outstanding.

Many bargain hunting investors look for stocks with P/S ratios of 2.0 or less.

They believe that these securities offer the most potential for future price appreciation.



Very low P/S multiples of 1.0 or less are especially attractive

Especially attractive to these investors are very low P/S multiples of 1.0 or less.

Think about it:  With P/S ratio of, say, 0/9, you can buy $1 in sales for only 90 cents!

So long as the company isn't a basket case, such low P/S multiples may well be worth pursuing.




High P/S aren't necessarily bad.

While the emphasis may be on low multiples, high P/S ratios aren't necessarily bad.

To determine if a high multiple - more than 3.0 or 4.0, for example - is justified, look at the company's net profit margin.

Companies that can consistently generate high net profit margins often have high P/S ratios.




Valuation rule to remember:

High profit margins should go hand in hand with high P/S multiples.

That make sense because a company with a high profit margin brings more of its sales down to the bottom line in the form of profits.