Investing term
What is P/S ratio (price-to-sales)?
Market cap ÷ revenue. What you're paying per dollar of sales the company brings in.
The price-to-sales ratio (P/S) compares a company's market value to its revenue: market cap divided by annual sales, or price per share divided by sales per share. It tells you how many dollars you're paying per dollar of the sales the company brings in.
It's especially useful for valuing fast-growing firms that don't yet have profits to anchor a P/E — a young company burning cash to grow has no earnings, but it has revenue, so P/S offers a valuation handle where P/E can't. The big caveat is that P/S ignores costs and profitability entirely: a low P/S doesn't guarantee a bargain, because a company might have lots of sales but no path to profit. A dollar of sales at a high-margin software firm is worth far more than a dollar of sales at a razor-thin-margin retailer, so P/S is only comparable within similar business types, and always needs to be read alongside whether those sales can ever become profit.
The price-to-sales ratio is market cap ÷ revenue — useful for fast growers that lack profits for a P/E. But it ignores costs, so a low P/S doesn't guarantee a bargain.
For example
A fast-growing but unprofitable software company trades at 8× sales, while a supermarket trades at 0.3× — very different P/S ratios reflecting their very different margins and growth.
Learn it by doing
That's P/S ratio (price-to-sales) in theory — it clicks when you use it. Practise it hands-on in a free, interactive lesson (Stage 15, Valuation for Investors).
Try the free lesson →Why it matters to you
The P/S ratio matters because it provides a valuation anchor for companies that P/E can't handle — the unprofitable, fast-growing firms common in tech. But its blindness to profitability is a serious limit: sales alone say nothing about whether a business makes money. Using P/S to compare similar businesses, while always asking whether the revenue can translate into profit, is what keeps it from flattering companies that sell a lot but earn nothing.
⚠ Ignoring profitability behind the sales
Price-to-sales counts revenue but ignores costs, so a low P/S can hide a business that sells plenty but has no realistic path to profit. Judging a company cheap on P/S alone, without asking whether those sales can become earnings, is how investors overpay for revenue that never turns into profit. Always pair P/S with a view on margins and profitability.