P/S Ratio

In short

Price-to-Sales — stock price relative to revenue per share

How much you're paying for each dollar of revenue a company brings in. A company with a $10B market cap and $2B in annual revenue trades at a P/S of 5 — you're paying $5 for every $1 of sales. It's most useful when there's no meaningful P/E to look at, because earnings are negative or barely positive.

P/S divides market capitalization by trailing twelve-month revenue (equivalently, share price by revenue per share). Because it only needs a top-line number, it still works for early-stage or cyclical companies with negative or erratic earnings, where P/E breaks down entirely. But P/S says nothing about profitability, margins, or debt — two companies with an identical P/S can have very different paths to earning a profit, or none at all. It also ignores capital structure: EV/Sales, which adds debt and subtracts cash, is the more apples-to-apples comparison between companies with different leverage. Typical P/S levels vary sharply by sector — high-margin software businesses command higher multiples than low-margin retailers or distributors, for the same reason their gross margins differ.

Formula

P/S = Stock Price ÷ Revenue Per Share

Thresholds

<1: Potentially undervalued
1-5: Normal range
5-10: Growth premium
>10: Very expensive — needs explosive growth

Related concepts

P/E Ratio — Imagine buying a lemonade stand that makes $100/year. If it costs $2,000, the P/E is 20 — you need 20 years of earnings to pay it off. Lower means cheaper.
Revenue Growth — If a company sold $100M last year and $120M this year, revenue grew 20%. Fast growth is exciting but check if it's profitable growth or just spending more to sell more.
Gross Margin — If you sell a sandwich for $10 and the ingredients cost $3, your gross margin is 70% — the product itself is highly profitable before rent, salaries, or marketing even enter the picture. A supermarket reselling the same sandwich for $10 after paying $8 to stock it has a gross margin of just 20%.