Price/Sales (P/S) – The smaller the numerical ratio the better.
This is one of the Valuation Ratios which lets you know if a stock is a good bargain buy. It helps answer the question “Is the company stock undervalued or overvalued?” Be careful to use other performance metrics along with any valuation ratio since a company may be undervalued due to poor performance.
Calculate this ratio using the below equation. Values in the equation can be acquired from the Income Statement and Daily stock price reported.
Equation:
P/S = (No. Shares Outstanding x Market Price per Share) ÷ (Total Revenue ttm)
P/S = (Market Capitalization) ÷ (Total Revenue ttm)
Where: No. Shares Outstanding = (Mkt. Cap.) / (Market Price per Share)
NOTE-1: Verify Profitability (Net Income) when using P/S ratio; a P/S can exist when P/E=0
NOTE-2: P/S is best metric for valuation since sales are not so easy to manipulate. Earnings can be manipulated so P/E should be used with caution. (Sales are the first entry of the Income Statement and are also known as Revenue or the Top Line).