What is the price-to-sales (P/S) ratio?
P/S compares a company’s value to its revenue. Useful for fast-growing or loss-making firms that don’t yet have meaningful profits to value on P/E.
The price-to-sales (P/S) ratio compares a company’s market value to its total revenue (sales). It answers: how much are investors paying for every rupee of the company’s sales? It’s the revenue-based cousin of the P/E ratio.
Its main use is valuing companies where P/E doesn’t work — typically young, fast-growing, or currently loss-making businesses (think many new-age tech listings) that have strong sales but little or no profit yet. Since revenue is harder to manipulate than profit, P/S can also be a useful cross-check on richly-valued stocks.
The catch: sales aren’t profits. A company can have huge revenue and still lose money, so a low P/S isn’t automatically cheap, and a high P/S demands that those sales eventually convert into real profit. Use P/S alongside margins and a path to profitability, never on its own.
Formula
P/S = Market capitalisation ÷ Annual revenue
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Common questions
When should I use P/S instead of P/E?
P/S is handy for companies with little or no current profit (so P/E is meaningless or negative) — often high-growth or newly-listed firms. For profitable companies, P/E and other measures usually tell you more.
Is a low P/S always good?
No. Low sales valuation can reflect thin or no margins. A company must eventually turn those sales into profit, so always pair P/S with profitability and growth prospects.