Is Price to Sales Ratio is a Prime Factor to Reflect Future Growth

Price to Sales ratio = Share price ÷ Sales per share

Price to sales ratio is also known as the Price/Sales ratioor P/S ratio and is used most commonly for shares and stock analysis. It isbasically a relative measure between the market price of share and revenuegenerated for a specific period.

Sales per share use the weighted average approach for calculation which uses the opening and closing balance of shares during the period. Price to sales ratio is calculated by dividing share price with sales per share. Revenue or sales value can be easily available from the income statement of a company. While on the other side share price is readily a public figure available via stock exchange or internet.

Price to Sales Ratio

How the price to sales ratio is useful for investors

Price to sales ratio is an alternative for the price toearnings ratio where the company is making a loss instead of profits. Somepeople may also like to use price to sales ratio as P/E ratio can be easilymanipulated by using different practices. An essential part of in-depthanalysis is to look at the company from different aspects. For that purpose,always try to use multiple financial measures at once to get a clear picturewhile highlighting any issues which may not be visible with just a singleformula.

Price to sales ratio formula limitations

In the numerator, one has to use the share price, as it isthe case with P/E or Price to book value formula. P/S ratio does nottake into account the profitability of the company and only look into therevenue generation irrespective of any expenses or overheads. Comparingcompanies even within the same industry becomes troublesome due to a number offactors.

Moreover, the price to sales ratio does not consider thedebt load on the balance sheet of a company. A company with no debt load willalways be in the top priority of an investor rather than a company fully loadedwith debt.

Price-to-sales ratio example

Let suppose that Bruno Lick Co. publishes its financialstatement for 2017 and you are an accountant at a firm which wants to calculatethe price to sales ratio for Bruno Lick Co. for investment purpose. The salefor the fiscal year 2017 is $440 million. The balance sheet shows 70 millionordinary shares. The share price is $9 in the market during that financial year.

Calculating sales per share;

Sales per share = $400 ÷ 70

= $5.71

Price to sales ratio = $9 ÷ $5.71

P/S ratio = 1.58