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Glossary
Valuation

P/S ratio

Price to sales

Market value against revenue. Used when there are no profits to divide by.

For a company that loses money, the P/E does not exist, so the P/S becomes the fallback. It answers a limited question: what are you paying per pound of revenue?

Its weakness is that it ignores whether that revenue is profitable at all. A pound of software revenue at 85% gross margin is worth many times a pound of grocery revenue at 3% net margin, and P/S cannot tell them apart.

The formula
P/S = Market cap ÷ Annual revenue
Figure

The order matters more than the maths

Do I understand how it makes money?1st
Does it actually make money?2nd
Will it survive a bad year?3rd
Is it cheap?last

Cheapness is the last question. Ask it first and you produce a list of companies the market has given up on, and it is usually right.

Why it matters

It is the only multiple available for early-stage and loss-making companies.

The mistake everyone makes

Comparing P/S across business models with different margins. It is only meaningful within an industry.

Related terms

P/E ratio
How many years of current profit you are paying for the shares.
Gross margin
What is left of each pound of sales after the direct cost of making the thing.

See P/S ratio on a real company

SteadyShares pulls this straight from the filings for 1,100+ companies, alongside moat scores, DCF fair value and peer comparison. Free to look around.

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