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Sometimes called PSR or P/S ratio, Price-to-sales ratio is a stock valuation metric that many analysts consider to be more reliable than the P/E or Price-to-earnings ratio.
The price to sales ratio can be calculated by dividing the stock price by the revenue per share or by dividing the market capitalization of the company by its most recent fiscal year revenue.
The price to sales ratio is usually used to compare companies that are within the same industry; this is because capital structures and profit margins vary vastly between companies that are not in the same industry and therefore the price to sales ratio of these companies will vary a lot too. For example, a company in the discount retailers industry that have a profit margin of 2% will have a very different price to sales ratio than a company in the Internet industry that have a profit margin of 20%.
In general investors prefer to buy stocks with a low price to sales ratio because in this case the investor is paying less money per unit of sales.
The main problem of the price to sales ratio is that it contains little information about a company. It doesn't contain for example information regarding the company's debt; This ratio can tell you that some companies are bargains while these companies are nearly bankrupt.
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