Price to Sales Ratio Calculator
With this price to sales ratio calculator you can find out if a company is undervalued or overvalued relative to its peers using the P/S ratio. This metric will help you to analyze the attractiveness of the company within its industry.
This article will explain what is the price to sales ratio and how to calculate it. Moreover, we will also show you how to apply the price to sales ratio by industry to help you understand the price to sales ratio formula. By the end of this article, you will understand what is a good price to sales ratio and know how to identify undervalued companies to invest in.
What is the price to sales ratio (P/S ratio)?
The price to sales ratio, also known as the price/sales ratio or P/S ratio, is a metric that compares the sales of a company's stock to the price of the same company's stock. As sales are often called revenue, the P/S ratio is often referred to as the price to revenue ratio or the price/revenue ratio. It is used to measure how much the market values that particular stock.
This ratio is often used along with the famous P/E ratio in assessing a company's attractiveness compared to its peers. We have designed the following example to tell you exactly how to use our price to sales ratio calculator to achieve this, so keep reading.
How to calculate the price to sales ratio (P/S ratio)?
To demonstrate the calculation of the price to sales ratio, we will take Company X as an example:
- Name: Company X
- Most recent sales figures:
- Number of shares outstanding:
- Price per share:
The calculation of the price to sales ratio is relatively straightforward, it only requires 5 steps:
- Obtain the most recent sales or revenue of the company
A company's sales are effortless to obtain. You can usually find its most recent annual report online, most often on their website. After downloading their annual report, go to the income statement and look for the most recent sales or revenue figure.
In our example, Company X's sales figure is
$15,000,000, which we will use to demonstrate the price to sales ratio calculation.
- Obtain the number of shares outstanding on the market
The number of shares outstanding is the number of shares the company has trading on the market. This information can also be found in companies' annual reports. Company X is assumed to have
1,000,000 shares outstanding.
- Calculate the sales per share of the company
The formula below is used to calculate the sales per share:
sales per share = sales / number of shares outstanding
So, in our example,
sales per share = $15,000,000 / 1,000,000 = $15.00.
- Obtain the price per share of the company
price per shareis probably the easiest to obtain, a quick online search will usually suffice.
In this example, the
price per shareof Company X is
- Calculate the price to sales ratio of the company using the price to sales ratio formula
You can calculate the
price to sales ratioby using the following formula:
price to sales ratio = price per share / sales per share
price to sales ratioof Company X is
$30 / $15 = 2x.
The lower the price to sales ratio, the more undervalued the company is, and the more qualified the stock is for a 'Buy'. For instance, if Company Y has a price to sales ratio of 1.5x, one could argue that Company Y is undervalued when compared to Company X. Hence, it would be a good idea to long Company Y and short Company X.
Although the price to sales ratio is a powerful investment metric, you should only compare it with similar companies. It will be meaningless to compare the price to sales ratio of an oil and gas company, like Shell, to a technology company, like Google, since both companies function in drastically different ways. To understand what is a good price to sales ratio, it is essential to understand the price to sales ratio by industry, and you should only use this metric if the companies are in the same industry.
Advantages of price to sales ratio (P/S ratio)
There are several advantages of knowing what the price to sales ratio is and how to use it:
- Sales figures are harder to manipulate
Compared to earnings or net profit, the sales figure struggle to be manipulated. Net profit is the bottom line of the company, and is an accounting number after deducting various costs from the sales or revenue of a company. Hence, companies can use different accounting principles to manipulate a company's earnings, preventing it from reflecting the intrinsic value of the company.
- It's applicable for all companies
While the price to earnings ratio (P/E ratio) can only be applied to profitable companies, the price to sales ratio does not have this limitation. This metric can be applied to all companies as the revenue of a company can never be negative.
- Sales figures are less volatile than earnings
Compared to net profit, sales figures usually are more stable. While net profit can be very volatile when companies are restructuring their operation, sales figures, being the top line of a company, tend to stay relatively consistent.
Disadvantages of price to sales ratio (P/S ratio)
There are, however, some disadvantages of using the price to sales ratio. As the ratio uses the top line of the company, it does not capture the cost structure. It also neglects the operating effectiveness of different companies.
Hence, it is dangerous to base your investment decision on a single metric like the price to sales ratio. It is recommended to analyze multiple metrics before making your investment decisions.