Price-to-sales ratio

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Price-to-Sales Ratio

A ratio of a company's share price to its revenue from sales over a given period of time, especially a quarter or a year. Fundamentalists and value investors see a low ratio as more positive because it indicates that the company has a great deal of revenue and a fair price, while technicians see a high ratio as more positive because it indicates that share price has increased and will likely continue to increase. In both cases, however, analysts believe the ratio reveals less than other ratios, such as the price-earnings, because price-to-sales does not account for operating expenses in any way.

Price-to-sales ratio.

A price-to-sales ratio, or a stock's market price per share divided by the revenue generated by sales of the company's products and services per share, may sometimes identify companies that are undervalued or overvalued within a particular industry or market sector.

For example, a corporation with sales per share of $28 and a share price of $92 would have a price-to-sales ratio of 3.29, while a different stock with the same sales per share but a share price of $45 would have a ratio of 1.61.

Some financial analysts and money managers suggest that, since sales figures are less easy to manipulate than either earnings or book value, the price-to-sales ratio is a more reliable indicator of how the company is doing and whether you are likely to profit from buying its shares.

Other analysts believe that steady growth in sales over the past several years is a more valuable indicator of a good investment than the current price-to-sales ratio.

References in periodicals archive ?
We have checked data going back to the 1950s," he says, "and companies with low price-to-sales ratios turn out to be the best performers in the future.
The trouble, says O'Shaughnessy, is that some stocks sell at a low price-to-sales ratio because the company's prospects are dim.
In 2009, the RevenueShares ETFs posted strong performance versus their S&P benchmarks, a potential signal to investors that companies with relatively lower price-to-sales ratios have historically rewarded investors in a period of stock market recovery.