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Price-to-Sales Ratio - P/S Ratio

In case of a negative price-to-earnings ratio it can not be used as a key performance figure and therefore an alternative figure needs to be calculated. In this case the price-to-sales ratio can be used. Companies that have just been started very often do not generate any earnings and profits yet. Also in these cases the price-to-sales ratio can be used as an alternative key performance figure for any kind of fundamental analysis. 

[Translate to English:] Fundamentale Kennzahlen

Calculation

Formal Calculation:

Price-to-Sales Ratio = Stock market price of a share / Sales per Share

A price-to-sales ratio of < 1 is considered as good. 

The FScore takes the price-to-sales ratio into consideration with a value of 15%. 

Please note that the price-to-sales ratio is only being used for the calculation of the FScore when the price-earnings ratio is negative for the analyzed period of time. 

[Translate to English:] Eigenkapitalquote

Discussion

Mainly for companies with a cyclic and fluctuating sales return the price-to-sales ratio can be a much more reliable key performance figure than the price-earnings ratio. For companies that are in some kind of a turnaround situation and for companies that have just been founded and are therefore still facing high investments and low earnings, the price-to-sales ratio can deliver useful insight for value oriented investors. 

Supporters of the price-to-sales ratio as a key performance figure for fundamental analysis also highlight that the balance sheet earnings can easily be manipulated. In this line of argumentation the price-to-sales figure is a much more reliable figure than the balance sheet earnings. 

But one might argue that the price-to-sales ratio ignores the profitability of one company and that the price-earnings ratio therefore is a much better and more reliable performance figure. 

Example: Company A with a price-to-sales ratio of 2 is still much better rated than company B with a price-sales-ratio of 1 in case that company A is able to generate double the return on sales than company B in the longterm. 

High sales and a consequently low price-to-sales ratio do not allow any forecast on the longterm profitability of one company. Furthermore also the sales figures of the balance sheet can be manipulated and thus change the price-to-sales ratio. 

During the period of the so called new economy bubble from the late 1990ies until the beginning of 2001 the price-to-sales ratio has lost a lot of its reputation. During that period of time the price-to-sales ratio has been used in order to justify very high stock markte prices of basically unprofitable companies. After the burst of the bubble in 2001 the price-to-sales ratio has not been as popular anymore. But still many high profiled financial analysts believe in the price-to-sales ratio as an important tool for financial analysis. 

[Translate to English:] US-GAAP und IFRS

Conclusion

It is highly recommended to use other financial figures and not only rely on the price-to-sales ratio. Following the finanzoo.de approach of a fundamental analysis these additional key performance figures are mainly the price-to-book ratio and the price-earnings ratio. Furthermore the return on investment, the price-cashflow ratio and the dividend yield are considered as important key performance figures for the fundamental analysis of one company.