| The Price-to-Sales (or Price/Sales or P/S) ratio is | | | | to compare P/S ratio to the P/S ratios of other |
| defined as (Market Capitalization)/(Sales). The | | | | companies in a given industry. It is also necessary |
| market capitalization is the current price of a | | | | to check for trends of this and other ratios. |
| share multiplied by number of shares. The sales is | | | | Some companies have cycles in earnings and |
| the revenue from sales for the previous year. | | | | sales. There might be more expenses in one year |
| This ratio could be also calculated as (Share price) | | | | than in the previous one. At the same time the |
| (Sales per share). | | | | company might have more sales than in the |
| P/S ratio measure how much is the market willing | | | | previous year. In that case P/E ratio could be low |
| to pay for the each dollar of sales. For example, if | | | | or even negative, while the company is actually |
| the P/E ratio is 15 then investors are willing to | | | | getting better. |
| pay 15$ for each dollar of sales. Low P/S ratio | | | | It is important to notice that low Price to Sales |
| might indicate that the company is either | | | | ratio might mean that there is something |
| undervalued or in troubles. It is necessary to | | | | fundamentally wrong with that company. Always |
| check other parameters to see which is true. | | | | assume that there is a reason why the company |
| Price / Sales could be used as a substitute for a | | | | has small P/S ratio, and look for parameters |
| Price to Earnings ratio when the earnings are | | | | confirming that. If you find little or no evidence |
| negative. The Earnings could be negative because | | | | that the company is in troubles, then consider this |
| it is calculated as Sales-Expenses. It is important | | | | as a buy signal. |