Price-to-Sales Ratio (P/S)

The Price-to-Sales (P/S) Ratio is a valuation metric that divides a company's market capitalization by its annual revenue (or stock price by revenue per share). It shows how many dollars investors are willing to pay for each dollar of company sales.

Formula

P/S Ratio = Market Cap ÷ Total Revenue

Alternatively: P/S Ratio = Stock Price ÷ Revenue Per Share

Example

Apple (AAPL) with a market cap of $3 trillion and revenue of $400 billion has a P/S ratio of 7.5. Amazon (AMZN) with similar market cap but much higher revenue ($600+ billion) has a P/S ratio around 5.

How to Interpret It

• Lower P/S (< 2): The stock may be undervalued, or it's a low-growth or mature industry. Compare to peers and history.
• Higher P/S (> 5): The stock is expensive relative to sales, or investors expect high growth and future profitability.
• P/S < P/E: Generally bullish; it suggests profits are growing as a percentage of sales.
• Comparison to peers: A P/S of 3 means little in isolation; compare to similar companies' P/S ratios and the industry average.
• Cyclical industries: Use normalized or averaged revenue in cyclical industries where sales vary widely year to year.

Limitations

• P/S doesn't account for profitability; a high-revenue company can be unprofitable. Tesla has high P/S despite high valuations.
• One-time revenue boosts (asset sales, accounting changes) can artificially inflate revenue and lower the P/S ratio.
• Different revenue recognition methods (software: upfront vs. over time) can distort comparisons across companies.
• Capital-intensive businesses with low margins may have high revenue but low net income; P/S ignores operating leverage.

Related Terms

• P/E Ratio — price divided by earnings, more focused on profitability
• Price-to-Book Ratio — price divided by book value, asset-based valuation
• PEG Ratio — P/E adjusted for growth rate
• Valuation — whether a stock is cheap or expensive