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
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