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.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved

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.

Dictionary of Financial Terms. Copyright © 2008 Lightbulb Press, Inc. All Rights Reserved.
References in periodicals archive ?
The assessment process in valuing stocks for more than half of the surveyed analysts includes calculating price-to-earnings or price-to-sales ratios;
(3) Unfortunately, total offer value is afflicted with the nonnormality problem (skewness = 10.6, kurtosis = 217.4) that we observe for price-to-sales ratios, as well as with the heteroskedasticity problem.
Industry price-to-sales ratios are another proxy for growth because firms from the same industry tend to have similar growth opportunities.
Similar to Kim and Ritter (1999), the industry median price to sales is based on the price-to-sales ratios of five or fewer of the most recent IPOs during the past two years that have the same three-digit Standard Industrial Classification (SIC) code as the IPO firm.
This small-denominator problem induces considerable nonnormality in the price-to-sales ratio. For instance, in our sample, the skewness of the cross-sectional distribution of price-to-sales ratio is 26.9 and the kurtosis is 856.5.
There was also a significant distribution of premiums paid as purchase price-to-sales ratios ranged from 0.6:1 to 7.3:1 for all but one transaction.
What's more, he disregards traditional value measurements like P/E ratios and price-to-book or price-to-sales ratios.
It's time to start looking at things like price-to-earnings ratios, forward price-to-earnings ratios, price-to-book ratios, price-to-sales ratios, earnings per share and company fundamentals.
The next screen deals with Valuation Factors, including price-to-earnings, price-to-book, and price-to-sales ratios, with definitions of each.
While Smith focuses on a company's price-to-book ratio, James O'Shaughnessy of O'Shaughnessy Capital Management, Greenwich, Connecticut, says the price-to-sales ratio is the best value indicator.
The trouble, says O'Shaughnessy, is that some stocks sell at a low price-to-sales ratio because the company's prospects are dim.
Currently, for example, the average stock has a price-to-sales ratio of 3:1, so O'Shaughnessy starts by screening for stocks with a ratio under 1.5:1.