The Price-to-Sale ratio, or P/S ratio, is the ratio of the market cap to revenue. It is similar to the P/E ratio and is an important tool for valuing stocks.
However, there are significant differences between the P/S Ratio and P/E Ratio. The P/S ratio is suitable for evaluating companies that are not profitable, cyclical, or are in a growth phase.
In contrast, the price-to-earnings ratio (P/E ratio) is more appropriate for assessing companies with stable operations.
The P/S ratio was introduced by investment guru and author Kenneth Fisher. He first detailed and popularized this analytical tool in his 1984 book “Super Stocks.”
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The purpose of using the P/S ratio is to value a company using the ratio of a company’s market capitalization to its total revenue. So it excludes the influence of potentially manipulated data such as company earnings or costs.
As a fundamental analysis metric for company stocks, investors can check the P/S ratio from
Below is the P/S ratio for Apple stock from the Futu Moomoo APP:
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Table of Contents
What is the P/S Ratio? How is it calculated?
The price-to-sales ratio (P/S ratio) is a metric that indicates the ratio of a company’s market capitalization to its annual total revenue.
Generally, companies with a lower P/S ratio are considered more attractive investments because their market value is relatively small compared to their total revenue, often suggesting that the stock is undervalued.
Total revenue is less susceptible to manipulation compared to net profit, making the P/S ratio a more reliable indicator of a company’s valuation in certain situations.
There are two ways to calculate the market-to-book ratio:
Market Capitalization Method
P/S Ratio = Market Cap ➗ Revenue
where:
Market Cap = Share Price x Shares Outstanding
and
Revenue refers to the company’s annual total revenue (sales), which can be found in the company’s financial statements.
For example, for Apple Inc. (AAPL), we can find the total revenue in its 10-K annual report.
| As of September 2023 | numerical value |
|---|---|
| Stock price | $171.21 |
| Shares Outstanding | 15812.5 Billions |
| Revenue | 383285 Billions |
So.
P/S ratio = 171.21 x 15812.5 Billions / 383285 Billions
= 7.1
Over the past decade, Apple’s P/S ratio is shown below:
It can be seen that during 2015, Apple’s price-to-sales ratio reached its lowest point in a decade, while at the end of 2020, the P/S ratio reached its highest point in ten years.
Per Share Method
The company’s stock valuation divided by the sales per share can be calculated using the following formula:
P/S Ratio = Stock Price ➗ Sales Per Share
where:
Sales Per Share = Revenue / Shares Outstanding
How to check the P/S ratio in Futu Mmoomoo?
Go to the Futu Moomoo APP and find the stocks of interest.
Here is an example of AAPL:
Once you are on the individual stock page, find [Analysis] at the top menu.
Select [Fundamental] and then select [PS]
“PS” stands for the price-to-sales ratio.
Pros and Cons of using P/S Ratio
Pros
- The P/S ratio cannot be negative and can provide a meaningful valuation for companies that are unprofitable or have negative equity.
- The P/S ratio is relatively stable and less susceptible to manipulation.
Cons
- The P/S ratio)cannot reflect changes in costs. But costs are an important factor affecting a company’s value.
- The P/S ratio is often used for comparisons within the same industry, as comparisons across different industries are not meaningful.
- The P/S ratio does not account for companies with high levels of debt, as these companies require higher sales to repay their debts. In such cases, the P/S ratio may not provide sufficient guidance.
Which Companies Are Suitable for P/S Ratio Analysis?
The price-to-sales ratio (P/S ratio) does not take costs into account, making it particularly useful for valuing companies with little or no profit.
At the same time, the P/S ratio is also considered an effective metric for evaluating startups, high-growth potential companies, or cyclical companies that may not be profitable every year.
For example, in its early stages, Amazon did not generate a profit but had consistent revenue. In such a case, using the price-to-earnings ratio (P/E ratio) to analyze the company would often make it difficult to understand its operational status.
The P/S ratio of Amazon is shown in the chart below:
It can be seen that in 2012-2013, the price-to-earnings ratio (P/E ratio) reached extremely high levels (close to 4000). However, in most years, the P/E ratio was zero. Therefore, using the P/E ratio to describe Amazon’s performance is not accurate.
On the other hand, using the P/S ratio often provides a better evaluation.
Amazon’s P/S ratio, as shown below, did not exhibit extreme values during the 2012-2013 period.
Thus, the P/S ratio can better evaluate a company’s early stages or periods when the company is not profitable or has very low profits.
If a company has not been profitable or has even incurred losses in the past year, the price-to-sales ratio (P/S ratio) can provide a better assessment of the company’s stock relative to other companies in the same industry, unless the company is on the brink of bankruptcy.
For example, if a company has a P/S ratio of 0.7, while the industry average is 2.0, and the company manages to turn around or maintain a healthy operation, its stock price could see a significant increase as its P/S ratio aligns more closely with its peers.
Additionally, in highly cyclical industries such as semiconductors, only a few companies may generate profits in certain years, but this does not mean that semiconductor stocks are worthless.
In such cases, investors can use the P/S ratio instead of the price-to-earnings ratio (P/E ratio) to determine how much they are paying for each dollar of the company’s sales rather than each dollar of earnings.
What are the types of P/S ratios?
The P/S ratio usually refers to the TTM P/S, but sometimes Forward P/S is also used to predict a company’s future situation.
TTM P/S Ratio
The TTM P/S ratio, or Trailing Twelve Month P/S Ratio, represents the P/S ratio over the past twelve months.
TTM P/S Ratio = Market Cap ➗ Revenue for the past 12 months
This is the most commonly used P/S ratio, calculated using the past twelve months’ sales, the number of shares outstanding, and the stock price to determine the state of a company’s stock.
Forward P/S Ratio
The Forward P/S Ratio is calculated using the forecasted future sales. This can provide some guidance, but the accuracy of the forecast is hard to guarantee because many factors can influence stock prices.
As such, there may be discrepancies between the predicted valuation and actual sales.
Comparison of P/S Ratios Across Different Industries
As of January 2024, the P/S ratios for various industries in the United States are as follows:
| Industry | P/S Ratios | Net Margin |
|---|---|---|
| Advertising | 1.82 | 0.89% |
| Aerospace/Defense | 2.03 | 4.96% |
| Air Transport | 0.39 | 2.79% |
| Apparel | 0.86 | 3.15% |
| Auto & Truck | 2.01 | 3.53% |
| Auto Parts | 0.63 | 1.62% |
| Bank (Money Center) | 2.65 | 30.89% |
| Banks (Regional) | 2.83 | 29.67% |
| Beverage (Alcoholic) | 3.17 | 8.59% |
| Beverage (Soft) | 3.69 | 13.73% |
| Broadcasting | 0.50 | -1.41% |
| Brokerage & Investment Banking | 2.28 | 12.44% |
| Building Materials | 1.86 | 8.00% |
| Business & Consumer Services | 2.35 | 5.45% |
| Cable TV | 1.28 | 10.69% |
| Chemical (Basic) | 0.85 | 3.52% |
| Chemical (Diversified) | 0.75 | -1.01% |
| Chemical (Specialty) | 2.19 | 10.93% |
| Coal & Related Energy | 1.24 | 15.80% |
| Computer Services | 1.12 | 4.40% |
| Computers/Peripherals | 5.28 | 17.47% |
| Construction Supplies | 1.79 | 10.17% |
| Diversified | 2.13 | 15.84% |
| Drugs (Biotechnology) | 6.44 | -11.88% |
| Drugs (Pharmaceutical) | 4.51 | 15.20% |
| Education | 2.07 | 1.30% |
| Electrical Equipment | 2.63 | 15.22% |
| Electronics (Consumer & Office) | 0.82 | -3.05% |
| Electronics (General) | 1.97 | 4.69% |
| Engineering/Construction | 0.93 | 1.67% |
| Entertainment | 2.52 | -0.23% |
| Environmental & Waste Services | 2.80 | 8.09% |
| Farming/Agriculture | 0.79 | 7.12% |
| Financial Svcs. (Non-bank & Insurance) | 4.35 | 15.44% |
| Food Processing | 1.41 | 6.00% |
| Food Wholesalers | 0.28 | 1.21% |
| Furn/Home Furnishings | 0.75 | -2.24% |
| Green & Renewable Energy | 3.20 | 15.26% |
| Healthcare Products | 4.75 | 8.19% |
| Healthcare Support Services | 0.53 | 2.25% |
| Healthcare Information and Technology | 4.76 | 5.72% |
| Homebuilding | 1.26 | 12.27% |
| Hospitals/Healthcare Facilities | 0.88 | 5.12% |
| Hotel/Gaming | 3.03 | 10.08% |
| Household Products | 3.02 | 11.08% |
| Information Services | 1.81 | 3.49% |
| Insurance (General) | 2.18 | 8.88% |
| Insurance (Life) | 0.97 | 0.72% |
| Insurance (Prop/Cas.) | 1.19 | 5.00% |
| Investments & Asset Management | 4.30 | 19.82% |
| Machinery | 2.70 | 9.77% |
| Metals & Mining | 2.69 | 7.23% |
| Office Equipment & Services | 0.82 | 0.81% |
| Oil/Gas (Integrated) | 1.26 | 12.40% |
| Oil/Gas (Production and Exploration) | 2.23 | 28.26% |
| Oil/Gas Distribution | 2.15 | 23.59% |
| Oilfield Svcs/Equip. | 0.51 | 6.22% |
| Packaging & Container | 0.90 | 2.85% |
| Paper/Forest Products | 0.80 | 3.86% |
| Power | 1.95 | 8.51% |
| Precious Metals | 3.65 | -4.26% |
| Publishing & Newspapers | 1.16 | 1.82% |
| R.E.I.T. | 6.54 | 12.61% |
| Real Estate (Development) | 2.49 | -16.35% |
| Real Estate (General/Diversified) | 4.08 | 16.91% |
| Real Estate (Operations & Services) | 1.14 | -3.14% |
| Recreation | 1.21 | 0.90% |
| Reinsurance | 0.59 | 6.36% |
| Restaurant/Dining | 3.41 | 10.66% |
| Retail (Automotive) | 0.68 | 4.32% |
| Retail (Building Supply) | 1.83 | 8.40% |
| Retail (Distributors) | 1.40 | 7.55% |
| Retail (General) | 1.43 | 3.09% |
| Retail (Grocery and Food) | 0.28 | 1.18% |
| Retail (REITs) | 7.74 | 23.32% |
| Retail (Special Lines) | 0.76 | 1.45% |
| Rubber& Tires | 0.20 | -2.53% |
| Semiconductor | 10.20 | 16.47% |
| Semiconductor Equip | 5.08 | 17.94% |
| Shipbuilding & Marine | 1.36 | 7.75% |
| Shoe | 2.79 | 9.49% |
| Software (Entertainment) | 6.01 | 20.35% |
| Software (Internet) | 7.63 | -14.32% |
| Software (System & Application) | 10.39 | 19.14% |
| Steel | 0.86 | 9.25% |
| Telecom (Wireless) | 2.18 | 8.79% |
| Telecom. Equipment | 3.40 | 13.98% |
| Telecom. Services | 1.07 | -0.28% |
| Tobacco | 3.62 | 27.52% |
| Transportation | 1.31 | 5.96% |
| Transportation (Railroads) | 5.28 | 23.52% |
| Trucking | 1.55 | 5.37% |
| Utility (General) | 2.25 | 13.51% |
| Utility (Water) | 5.29 | 19.34% |
| Total Market | 2.35 | 8.54% |
What’s the ideal P/S Ratio?
According to the initial definition of the price-to-sales ratio (P/S ratio), the lower the value, the better.
A lower P/S ratio indicates that investors are paying less for each unit of revenue, thus increasing the stock’s investment value.
According to Kenneth Fisher’s Recommendations Kenneth Fisher, the creator of the P/S ratio concept, has the following recommendations for the P/S ratio of a publicly traded company.
According to Kenneth Fisher
Kenneth Fisher, the creator of the P/S ratio concept, has the following recommendations for the P/S ratio of a publicly traded company.
For non-cyclical and technology stocks:
- Best case: P/S ratio ≤ 0.75
- Worth investing: 0.75 < P/S ratio ≤ 1.5
For cyclical stocks:
- Best case: P/S ratio ≤ 0.4
- Worth investing: 0.4 < P/S ratio ≤ 0.8
According to historical data
- A P/S ratio of less than 1 is generally considered excellent.
- A P/S ratio in the range of 1 to 2 is considered quite good.
- A P/S ratio above 4 is typically deemed too high.
Like most stock metrics, the P/S ratio is just one of many evaluation indicators, and it should be used in conjunction with other metrics.
Moreover, it is crucial to compare P/S ratios within the same industry, as overall operational conditions differ across industries, making cross-industry comparisons meaningless.
For instance, Walmart has a P/S ratio of 0.55, while Microsoft has a P/S ratio of 5.85. Judging by the criterion that a P/S ratio less than 1 is excellent, one might conclude that Walmart is undervalued and Microsoft is greatly overvalued.
However, looking at the net profit margins of both companies explains this discrepancy: Microsoft has a net profit margin of 28.45%, whereas Walmart’s is only 3.23%. Microsoft’s higher profitability is reflected in its stock price, resulting in a higher P/S ratio.
Differences Between P/S Ratio, P/E Ratio, and P/B Ratio
1. P/E Ratio
The P/E ratio is the ratio of a company’s market capitalization to its net profit.
The P/E ratio primarily considers the company’s operating conditions and is suitable for valuing companies with stable profits or those in a mature phase.
These industries are less affected by the market economy. Their performance and profitability are relatively stable, making the P/E ratio a more accurate reflection of their operating conditions and stock value.
The P/E ratio is not only suitable for comparing companies within the same industry but also for cross-industry comparisons.
2. P/S Ratio
The P/S ratio is the ratio of a company’s market value to its total revenue.
The P/S ratio only considers a company’s revenue, without taking profitability or asset holdings into account. Therefore, the P/S ratio is suitable for valuing companies that are not profitable, have negative earnings, or are in a growth phase, as well as cyclical companies.
3. P/B Ratio
The P/B ratio is the ratio of a company’s market capitalization to its book value.
Book Value refers to the value of a company’s assets as recorded in its books, reflecting the recorded value in the financial statements rather than the market value.
Book value is typically used to evaluate a company’s net assets or shareholders’ equity and can be calculated using the following formula:
Book Value = Total Assets – Total Liabilities
The P/B ratio is suitable for valuing banks, financial services companies, or insurance companies.
This is because the higher the net assets of these companies, the greater their ability to create value. The stock price will rise accordingly, and this relationship can be well-reflected through the P/B ratio.
FAQ
Q1: How is the P/S Ratio Calculated?
The formula for calculating the price-to-sales ratio (P/S ratio) is as follows:
P/S ratio = Market Cap / Revenue
Q2: Is a High or Low P/S Ratio Better?
Generally, a lower P/S ratio is better. A lower P/S ratio indicates that investors are paying less for each unit of revenue, thus increasing the stock’s investment value.
Q3: What is the difference between P/E and P/S ratios?
The P/E ratio is the ratio of a company’s stock price to its earnings per share. It primarily considers the company’s operating performance and is suitable for valuing companies in essential consumer goods industries such as food, healthcare, and public utilities, or companies in their mature phase.
The P/S ratio is the ratio of a company’s stock price to its revenue per share. It primarily considers the company’s operating situation without taking profitability or asset holdings into account, making it suitable for valuing companies that are unprofitable, have negative earnings, or are in a growth phase.
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