The price-sales (PS) ratio is a value metric which defines the relationship between a stocks price and the underlying revenue of the company. It is the amount that must pay for every 1 unit of revenue of the company. A higher PS indicates a larger expected future earnings growth.
A high PS could mean that a company is overvalued, a low PS could mean that a company is undervalued
- We can compare a company’s PS to it’s industry to gauge how expensive the company is relative to that industry for an apples-to-apples comparison.
- We can also compare a company’s PS to its historical PS to gauge if it is cheaper vs. history.
Price-to-Sales is one of the most performant value metrics. The intelligent investor should avoid stocks with very high PS and buy stocks with low PS. The PS ratio is better than PE in comparing growth stocks who might not yet have become profitable.