Price to sales ratio compares the price of a share to the revenue per share. This ratio is usually used for valuation of shares. It takes into account the past performance of a company for valuation of its shares.
Price to sales ratio is calculated for the trailing twelve months, unless stated otherwise. A lower price/sales ratio is usually considered to be a better investment because the investors have to pay less money for each unit of sales.
Price to sales ratio can vary substantially from industry to industry or sector to sector. Therefore, it is better to use it for comparison with the companies operating within the same industry or sector.
Calculation
Price to sales ratio is calculated by dividing the price per share by the revenue per share.
Price/Sales Ratio = Price per Share / Revenue per Share
Price per share is available from the stock market sources. Revenue per share can be calculated by dividing the revenue from income statement by the total number of shares.
Price to sales ratio can also be calculated by the following formula:
Price to Sales Ratio = Market Capitalization / Sales Revenue
Market capitalization can be calculated by multiplying the market price per share by the total number of equity shares. Sales revenue can be found from the income statement.
Norms and Limits
Price to sales ratio should be used with caution. It do not present the complete picture because it do not take into account the expenses and liabilities of a company. Besides, a lower price/sales ratio is not always a positive indicator because the company might be unprofitable with a lower price/sales ratio.
This ratio is usually calculated for the loss-making companies because price earning ratio (P/E Ratio) cannot be calculated for such companies.
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