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Price to sales ratio definition

Description

Price to sales ratio shows how much the company’s investors must pay for one dollar of the company’s sales. Data to calculate this ratio is collected from balance sheet and stock market bulletin.

This ratio is important, because it is calculated using the company’s sales, which brings a clearer view of the company’s compatibility in the market than earnings. P/S is important both for company’s owners and investors. As it is a very important ratio, it is not recommended to concentrate only on it alone.

Norms and limitations

In general, there are no norms for this ratio.

It is recommended to compare this ratio with those of the companies, working within the same industry.

Formula

Share price shows the current market price of the share.

Sales per share are calculated by dividing net sales by shares outstanding.