What is the price/sales ratio?
The price/sales ratio measures a company's share price against its revenues, also known as its turnover. The price/sales ratio is sometimes called the 'sales multiple'.
Where have you heard about the price/sales ratio?
As an investor, you may well have heard about the price/sales ratio in relation to companies whose shares you own. Your financial adviser may have referred to it, as may the financial media and guides to stock-market investment.
What you need to know about the price/sales ratio.
The price/sales ratio measures the value that the stock market is placing on a company's sales. It can be calculated either by dividing a company's market capitalisation by total sales or by working out the sales per share and dividing that figure by the share price. The ratio would be the same in either case. Thus £4 sales per share and a £12 share price gives a price/sales ratio of three. Some investors are largely uninterested in sales, preferring to focus on profit. For them, the price/sales ratio may not be telling them anything interesting.