Price-to-Sales Ratio (P/S)

The price-to-sales ratio compares a company’s market capitalization to its total revenue. Unlike P/E, it can be calculated even when a company has no profits, which makes it useful for evaluating unprofitable or early-stage companies. A P/S of 3 means investors are paying $3 for every $1 of annual revenue.

A lower P/S suggests you are paying less per dollar of revenue. What counts as low or high varies dramatically by industry. Software companies often trade at P/S ratios of 10 or more because they have high margins — most of that revenue turns into profit. Grocery chains might trade at a P/S of 0.3 because their margins are razor thin and a dollar of revenue only produces a few cents of profit.

P/S ignores profitability entirely. A company burning cash with no path to profit can have a low P/S that looks like a good deal but is actually a trap.

P/S is most commonly used to evaluate companies that are not yet profitable, where P/E is undefined. Software and biotech companies in their growth phase are often compared by P/S since it is the only valuation ratio that works across all of them.

Value-oriented investors sometimes screen for low P/S stocks (under 1.0) as a starting point, then investigate whether those companies have a realistic path to improving their margins.