Price-to-Sales is a ratio used in financial circles to compare a company’s stock price to its revenues or “sales.” Also notated as P/S, it can be calculated by dividing a company’s market capitalization (its current price multiplied by the number of outstanding shares) by its total sales over a chosen period (typically 12 months).
It’s best to compare P/S ratios for companies in similar industries and sectors. The P/S ratios for companies in the agricultural industry will be different from those in the entertainment industry because the pace and size of sales are different in those industries.
A P/S ratio can be helpful in observing if a firm is under- or over-valued. A low ratio could suggest that the price of a stock isn’t accurately reflecting its relatively significant sales, making it undervalued. Likewise, a high ratio could suggest an over-valued firm.
It’s important to take the P/S ratio and others like it with a grain of salt. One ratio alone does not provide anything close to a complete picture of the financial health of a company. They are just one tool in an analyst’s toolbelt to analyze the value of a company relative to its price.