Price to Sales Ratio

The price to sales ratio is one of the valuation ratios used with business valuations, specifically stock market pricing. It is one of the oldest ratios used in business and has very little modern day value. It is an unreliable ratio for any investor to use. It equals the market capitalization against total sales. Due to its antiquated utility, there are some unsophisticated users of this ratio.

Valuation Ratios

Valuation Ratios

Valuation ratios are the only group of business ratios that are externally and not internally driven. The market dictates valuation ratios. All three core valuation ratios are determined by the market price of the stock.  All three have the same numerator, the market share price or market capitalization value of the company. 

Price to Sales Ratio: A Poor Indicator of Value

The price to sales ratio is a marginal valuation ratio at best. It is really an offshoot of an antiquated concept of valuing a business. In the past, one of the more common methods to value a business deal was to use a multiplier of sales. The price to sales ratio used with business ratios is similar. Simply stated, the price to sales ratio is the entire market value of the company (the price) as a function of revenue (sales).

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