Price to Sales ratio = Share price ÷ Sales per share
Price to sales ratio is also known as Price/Sales ratio or P/S ratio and is used most commonly for shares and stock analysis. It is basically a relative measure between market price of share and revenue generated for a specific period.
Sales per share uses the weighted average approach for calculation which uses opening and closing balance of shares during the period. Price to sales ratio is calculated by dividing share price with sales per share. Revenue or sales value can be easily available from the income statement of a company. While on the other side share price is readily a public figure available via stock exchange or internet.
How price to sales ratio is useful for investors
Price to sales ratio is an alternative for price to earnings ratio where company is making loss instead of profits. Some people may also like to use price to sales ratio as P/E ratio can be easily manipulated by using different practices. An essential part of an in-depth analysis is to look at the company from different aspects. For that purpose, always try to use multiple financial measures at once to get a clear picture while highlighting any issues which may not be visible with just single formula.
Price to sales ratio formula limitations
In the numerator one has to use the share price, as it is the case with P/E or Price to book value formula. P/S ratio does not take in to account the profitability of the company and only look in to the revenue generation irrespective of any expenses or overheads. Comparing companies even within same industry becomes troublesome due to a number of factors.
Moreover, price to sales ratio does not consider the debt load on the balance sheet of a company. A company with no debt load will always be in top priority of an investor rather than a company fully loaded with debt.
Price-to-sales ratio example
Let suppose that Bruno Lick Co. publishes its financials statement for 2017 and you are an accountant at a firm which wants to calculate the price to sales ratio for Bruno Lick Co. for investment purpose. The sale for fiscal year 2017 is $440 million. The balance sheet shows 70 million ordinary shares. The share price is $9 in the market during that financial year.
Calculating sales per share;
Sales per share = $400 ÷ 70
Price to sales ratio = $9 ÷ $5.71
P/S ratio = 1.58