Price to Sales Ratio Calculator

Written by:
PK

On this page is a price-to-sales ratio calculator or P/S ratio calculator. Enter a company's price per share and annual revenue per share, or total market cap and total top-line sales in one year to compute the company's PS ratio.

Price to Sales Ratio Calculator

What is the Price to Sales Ratio?

The price to sales ratio compares the price you'd pay for equity in a company to the raw dollar amount of sales that equity represents in one year. Although company business models differ wildly, top-line revenue is the most truthful of all numbers on the income sheet and is worth sizing up.

Trailing Versus Future Price to Sales Ratios

Canonically, you calculate the price to sales ratio using the current market price compared to sales in 12 months. A one-year span will help counteract any seasonality in sales. Of course, that doesn't prescribe which twelve months you should use – future or past?

The most common sales numbers used in the price-to-sales ratio are:

  • TTM or LTM Sales - The trailing twelve months or last twelve months of sales (equivalent). These are actually realized sales in the books.
  • Run-rate Sales - Multiply the last quarter by 4 to predict a steady-state sales amount (note: beware of seasonality in sales). This is one way to estimate future sales.
  • NTM Sales or Future Sales - Using analyst estimates, company guidance, and your own modeling, you can guess what the company will sell in the next 4 quarters or twerlve months.

Strengths of Price to Sales

For most companies, revenue is one of the least volatile amounts on the income statement. Sales tend to persist for most mature companies in the public markets, and it's valuable to compare a company's current P/S ratio to its history to understand how the market values it at present. Even growth has some momentum – early-stage investors talk about growth persistence or growth decay, but high growth companies often continue to grow sales, if at a reduced rate.

For some early-stage companies (and all of the high-growth VC-funded set), sometimes sales (if you're lucky, sales and gross profit) are the only reliable metrics. Startups are, by definition, early stage, and some companies will only make sense at scale with large amounts of the target market captured. While it's possible to build a DCF model and apply an operating margin and exit earnings multiple, your estimates can be so wildly off that often it's best to stick to sales (or, again, gross profit) multiples.

Price to Sales – at least historically – was a useful way to compare companies in the same industry with similar business models. Kenneth Fisher (most likely) was the one to use the metric first. At a minimum, Fisher did more than anyone else to popularize price-to-sales – including in his book Super Stocks (affiliate link).

Limitations on Price to Sales

Price to Sales uses the current trading price of equity to compute a ratio but omits other claims on a company. For example, two competitors in the same industry with similar business models may have an equivalent price to sales ratio, but one may have much more debt on the balance sheet. So instead, using the EV to Sales multiple, or Enterprise Value to Sales (EV/S) multiple, which factors in cash and debt on the balance sheet, is probably a more appropriate measure.

Price to Sales helps compare companies with similar capital structures and business models but needs adjustment when you move across models (or even if a company's model changes over time). For example, Software companies nominally look alike, but marketplaces should fundamentally have much more revenue than pure software companies because you are ultimately concerned with what companies keep from those sales – their gross margin (among other margins).

Even in software, pure software companies with cloud-based tools or applications will behave differently than companies that touch the physical world. Software as a Sales (SAAS) models that sell application software should have higher gross margins than companies that touch capital assets or infrastructure – for example, ISPs or telecom networks, computer hardware, satellites, towers, cars, houses, food, or any other manner of assets or infrastructure.

When company business models are similar, but gross margins differ due to fundamental differences in business model, it's more appropriate to move past the gross margin and look at price to gross profit (P/GP) or Enterprise Value to Gross Profit (EV/GP) ratios.

Price to Sales Formula

The price to sales ratio formula is:

price\ to\ sales\ ratio=\frac{price\ per\ share}{sales}

Where:

  • Price per Share - the current trading price of a share of a company.
  • Sales - the revenue per share of a company over 12 months.

Valuation Ratios and Yields

      

PK

PK started DQYDJ in 2009 to research and discuss finance and investing and help answer financial questions. He's expanded DQYDJ to build visualizations, calculators, and interactive tools.

PK is in his mid-30s and works and lives in the Bay Area with his wife, two kids, and dog.

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