Price-to-Sales (P/S) Ratio: Definition and Use Cases
P/S compares a company's market value to its revenue and is useful for companies with volatile or negative earnings.
Formula
Use trailing twelve months (TTM) revenue or forward revenue estimates consistently across peers.
Why it matters
- 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.
Implementation notes
- Choose trailing vs forward revenue consistently across the peer set.
- Adjust for one-time revenue items, divestitures, or acquisitions.
- Combine P/S with gross margin or revenue growth to get a better sense of value.