Price to Sales Ratio Formula & Example

Definition: Price to Sales Ratio (PSR or P/S ratio) is calculated by dividing the company's market cap by the company's revenue; or, dividing the stock price per share by the revenue per share. It indicates how much investor paid for a share compared to the sales generated (per share) by the company. A lower ratio is considered a better investment as the investor is paying less for each unit of sales.

Formula:
Price to sales ratio = Market price per share / Sales per share
Or,
PSR = Market Capitalization / Total sales

Example 1:
If a company has a market cap of $20 million and revenue of $10 million. Then, the P/S ratio = 20 million / 10 million = 2

Example 2:
A corporation with sales per share of $35 and a share price of $105 would have a P/S ratio of 3 (Calculation: 105 / 35 = 3). This means that investors pay $3 for every dollar of sales that the corporation generates.

Example 3:
Wayne Ltd has sales of $20 billion and the stock has a total market capitalization of $18 billion, then the Price to sales ratio for Wayne Ltd is: 18 billion / 20 billion = 0.9

* Next: Return on Assets (ROA) Ratio

Author

Kelvin Wong Loke Yuen is an experienced writer with a strong background in finance, specializing in the creation of informative and engaging content on topics such as investment strategies, financial ratio analysis, and more. With years of experience in both financial writing and education, Kelvin is adept at translating complex financial concepts into clear, accessible language for a wide range of audiences. Follow him on: LinkedIn.

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