Term · Valuation
P/S Ratio (Price-to-Sales Ratio)
In briefThe P/S ratio compares the market capitalization with revenue and works even in the case of losses. Because it ignores margins, growth, and debt, it only serves as a rough first indicator and should always be supplemented with EV-based and margin-related metrics.
Definition
The price-to-sales ratio relates the market capitalization to a company's revenue. It is a revenue-based multiple that remains applicable even with negative earnings, when P/E or EV/EBIT are not meaningful. However, it takes into account neither margins nor debt.
How it is calculated
Formula. P/S ratio = market capitalization ÷ annual revenue
Why it matters for small caps
In young or loss-making small and micro caps, the P/S ratio is often one of the few available valuation measures. Without regard to margin and capital structure, however, it can lead to misjudgments.
Common misreadings
- A low P/S ratio is frequently misread as cheap, even though it can be justified for low-margin or highly indebted business models.
In the process
Frequently asked
How does the P/S ratio differ from EV/sales?
The P/S ratio uses market capitalization (equity), EV/sales uses the enterprise value including net debt. EV/sales is more comparable when debt levels differ.
When is the P/S ratio especially useful?
Above all for young, high-growth, or temporarily loss-making companies, for which earnings-based multiples like the P/E ratio do not yield a meaningful value.
What is the limitation of the P/S ratio?
It says nothing about profitability. Two companies with the same P/S ratio can be valued completely differently given widely differing net margins.
Related terms
Education only, not investment advice. Ranges and thresholds are didactic orientation values, not an official standard.