What is the Price-to-Sales Ratio?
The Price-to-Sales ratio compares a company’s market capitalization to its total revenue. It tells you how much investors are paying for each dollar of sales. Unlike the P/E ratio, P/S works even for companies that aren’t yet profitable — because every company generating revenue has a P/S ratio, regardless of whether it earns a profit.
A P/S of 2 means investors pay $2 for every $1 of annual revenue. Lower values generally indicate better value, though the “right” P/S varies significantly by industry.
Why it matters for investors
P/S is especially useful for evaluating high-growth companies that reinvest all their revenue into growth and don’t yet show earnings. It’s also harder for management to manipulate than earnings-based metrics, since revenue is a more straightforward number than net income.
Software companies often trade at P/S ratios of 10-20x because of their high margins and recurring revenue. Retailers might trade at 0.5-1x because of thin margins. Always compare P/S within the same industry.
How Stock Analyzer scores it
| Score | P/S Range | What it means |
|---|---|---|
| A | Below 1 | Paying less than $1 per $1 of revenue |
| B | 1 – 2 | Reasonably valued relative to sales |
| C | 2 – 3 | Moderate premium to revenue |
| D | 3 – 4 | Elevated valuation |
| E | Above 4 | High premium — needs strong growth to justify |
What to watch out for
A low P/S ratio isn’t always a bargain. A company with a P/S of 0.3 might have razor-thin margins and declining revenue — meaning it’s cheap for a reason. Always pair P/S with profitability metrics like gross margin and ROIC to understand whether the company can actually convert revenue into profits.