Price-to-sales (P/S).
In plain English
Price-to-sales divides market capitalization by twelve months of revenue, or share price by revenue per share. Its main use is companies that are unprofitable or barely profitable, where a P/E is meaningless or absurd. Revenue is also harder to manage than earnings, since it sits at the top of the income statement before most accounting judgment enters. The catch is that the ratio ignores cost structure completely. A dollar of revenue at a high-margin software firm and a dollar at a grocery chain are not remotely the same asset.
01Why it matters
It lets you put a number on companies that have no earnings yet, as long as you remember that revenue with no path to profit is not worth much per dollar.
02The math, step by step
A company has 200 million shares at $25, so market capitalization is $5 billion. Annual revenue is $2 billion. $5 billion divided by $2 billion is a price-to-sales of 2.5.
Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.
03What this is NOT
P/E measures price against profit, which is what owners keep. Price-to-sales measures price against revenue, which is what comes in the door before costs. Two companies with the same price-to-sales can have wildly different margins and therefore different earnings power.
04Receipts
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Plain-English answers from our glossary. Receipts included. Never advice.
Educational tool. Answers come only from ClearMoneySchool's published glossary and are not advice. Why we never give advice