Price to Sales Ratio
Price to Sales Ratio = Current Market Price / Reported Sales Revenue
Many companies state their revenue after removing the effects of onetime events whereas others continue to state the revenue without any adjustments.
The price to sales ratio tells an investor how many dollars they are paying for every dollar that the company has in sales. Hence if the price to sales ratio is 3, investors are paying 3 dollars for every dollar in sales. This needs to be benchmarked against the industry average to understand the context.
As in all market value ratios, there is an unrealistic assumption in price to sales ratio too. The assumption is that sales will continue to behave in the same manner for an extended period of time. However, analysts are not so concerned about sales being absolutely flat for an extended period of time. They are more concerned about the average value of sales for the future periods being the same or higher than it currently is.
As an absolute measure, price to sales ratio may not be perfect. However, ration analysis is not about absolute perfection. Price to sales is a better indicator of the fundamentals of the company as compared to price to book value, in the opinion of many critics.
- Price Earnings Growth (PEG) Ratio
- Price to Book Value Ratio
- Price to Cash Flow Ratio
- Dividend Yield Ratio
- Put Call Ratio
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