Skip to main content
ValuationP/S

What is the Price-to-Sales Ratio (P/S)?

The Price-to-Sales Ratio (P/S) compares a company's market capitalization to its total annual revenue. Unlike Price-to-Earnings, P/S works even when a company has no earnings, making it an essential tool for evaluating early-stage, high-growth, and cyclically depressed businesses. A low P/S can signal an undervalued company; an extremely high P/S demands that investors verify whether the growth story justifies the premium.

Formula

P/S = Share Price / Revenue Per Share (or Market Cap / Annual Revenue)

Why P/S Matters to Value Investors

Revenue is one of the hardest financial metrics to manipulate -- you either received the cash from customers or you did not. This makes P/S a more robust starting point than earnings-based multiples when screening for undervalued companies in sectors with volatile or cyclically depressed margins. Investors like Joel Greenblatt use revenue-based multiples as a sanity check on earnings multiples during sector rotations.

The key weakness of P/S is that it ignores profitability entirely. Two companies with identical P/S ratios can have vastly different values if one earns 40% operating margins and the other earns 5%. Use P/S alongside gross margin and operating margin trends to avoid buying cheap revenue at the cost of permanently unprofitable businesses.

Screen by P/S Ratio

Filter stocks by P/S ratio, EV/Sales, and 120 other value investing indicators across 73 global exchanges with the ValueMarkers screener.

Open Stock Screener →

Frequently Asked Questions

What is the Price-to-Sales Ratio?+
P/S is calculated by dividing a company's share price by its revenue per share, or equivalently by dividing total market capitalization by total annual revenue. It represents how many dollars investors are willing to pay for each dollar of sales. A P/S of 2.0 means the market values the company at twice its annual revenue.
When should you use P/S instead of P/E?+
P/S is most useful when a company has negative or near-zero earnings, making P/E meaningless or misleading. Pre-profit technology companies, biotech firms, turnaround situations, and cyclical businesses at the bottom of their earnings cycle are all cases where P/S provides a more stable valuation anchor. Ken Fisher popularized P/S analysis as a tool for finding large-cap growth companies with temporarily depressed profit margins.
What is a good Price-to-Sales Ratio?+
As a rule of thumb, a P/S below 2.0 is considered cheap for most industries, while P/S above 10 is expensive and implies very high growth expectations. However, industry context is critical: software-as-a-service (SaaS) companies with high gross margins and recurring revenue often trade at 8-20x sales, while grocery retailers with thin margins typically trade at 0.2-0.5x. Always compare P/S within the same sector and margin profile.
What is the difference between P/S and EV/Sales?+
P/S uses market capitalization (equity value only) as the numerator, while EV/Sales uses Enterprise Value (market cap + net debt). EV/Sales is generally preferred for comparing companies with different capital structures because it treats heavily indebted companies and cash-rich companies on equal terms. A company with a lot of debt will have a much higher EV/Sales than P/S, which can make the equity look deceptively cheap on P/S alone.

Related Terms

Price-to-Earnings Ratio

Market price relative to earnings per share

Enterprise Value

Total acquisition cost of a company

Revenue Growth Rate

Year-over-year revenue increase as a percentage

Operating Margin

Operating income as a percentage of revenue

Explore More

Investing Tools

Free Calculators

Learn

← Back to Glossary

Weekly Stock Analysis - Free

5 undervalued stocks, fully modeled. Every Monday. No spam.

Cookie Preferences

We use cookies to analyze site usage and improve your experience. You can accept all, reject all, or customize your preferences.