Module 31.3: P/S Ratio

The P/S ratio is calculated by diving price per share over sales:

The ratio is has many unique advantages, for instance because revenue is always positive, we can use this ratio to analyze distressed firms. Sales revenues are harder to manipulate in comparison to EPS or book value and the ratios themselves are less volatile then P/E ratios. P/S ratios can be good for both mature companies and start-ups with no earnings, and there is research to support that the ratio is related to long run average stock returns.

However, high growth in sales is not always an indicator of good operating profits, and the ratio does little to capture differences in cost structures across companies.

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