Understanding the Price to Sales Ratio (PSR) or the Price to Sales Ratio and its formula – Price to Sales Ratio (PSR or P / S Ratio) is a financial ratio that compares the company’s stock price to its annual sales.
Similar to Price to Earnings Ratio (PER) and Price / Earnings to Growth Ratio (PEG), Price to Sales Ratio is usually used for stock valuation or commonly referred to as the Investment Valuation Ratio or Stock Valuation Ratio.
Price to Sales Ratio is one of the most basic and easy to understand valuation ratios that is widely used by investors to make investment decisions.
Investors will naturally want to know how much sales they can generate on the capital they invest in. So this Price to Sales Ratio assesses a company based on actual operations without accounting adjustments.
How to calculate the price to sales ratio
Here is how to calculate the Price to Sales Ratio (P / S Ratio) along with its formulas and case examples.
Price to Sales Ratio formula
The Price to Sales Ratio is calculated by dividing the Price per Share with the Earnings per Share.
Price to Sales Ratio = Price per Share / Revenue per Share
Price to Sales Ratio = Market Capitalization / Sales
- Price per share can be seen from sources that contain stock market data, while Revenue per Share can be calculated by dividing the Company’s Revenue contained in the Financial Statements with the total number of shares outstanding.
- Market Capitalization can be calculated by multiplying Price per Share by the number of shares outstanding. Meanwhile, company revenue can be seen from the company’s financial statements.
Example of Calculation of Price to Sales Ratio
1. Revenue Per Share
As of April 20, 2004, the price per share of ABCD Corp with the issuer code ABC is $. 2,5, – while the revenue per share (Revenue per Share) is $. 3,5. What is the Price to Sales Ratio (Ratio of Price to Sales) of ABCD Corp?
- Price per Share = $. 2,5, –
- Revenue per share = $. 3.5, –
- Price to Sales Ratio =?
- Price to Sales Ratio = 2.5 / 3.5
- Price to Sales Ratio = 0,71 times
So the Price to Sales Ratio for ABCD Corp as of April 20, 2004, is 0.71 times.
2, Market Capitalization
On the same date and the same company, namely ABCD Corp as of April 20, 2004, we try to use the second formula, which is to share Market Capitalization with Sales. The data obtained are as follows:
- Market Capitalization = $ 2,5 million.
- Sales = $ 3,5. million.
- Price to Sales Ratio =?
- Price to Sales Ratio = Market Capitalization / Sales.
- Price to Sales Ratio = 2,5 miillion / 3,5 million.
- Price to Sales Ratio = 0.71 times.
So the calculation results of the two equations or formulas are the same.
Analysis and Appraisal of Price to Sales Ratio
Price to Sales ratio will generally differ from one type of industry to other industries. Therefore, it is better to use this P / S ratio with other companies with the same type of industry or sector.
A low ratio value indicates that the company’s stock is “cheaper” than a company that has a high ratio.
If the Price to Sales Ratio is high, this may indicate the company is overvalued and investors may be warned to stay away from the stock. On the other hand, a low ratio might indicate the company is being underestimated by other investors and might be a good opportunity to buy its shares.