Price To Sales Ratio

The Price to sales ratio or ps is another way to decide if a company is overvalued or undervalued. Instead of taking into consideration the earnings like the p/e the p/s looks at the overall sales of a company.

The formula for the PS ratio is

P/S= (outstanding shares)*(stock price)/ (Sales per Share)

We will say stock XYZ has a stock price of $32 and has 10 million shares. Well also say the stock made $320 million dollars in sales last year. In this case the P/S would be (10million)*($32)/ ($320 million) or 1.

If the number is less than 1 it is suppose to show an undervalued stock, if it is over 1 it is suppose to show an overvalued stock.

Other Ratios

Looking at different fundamental ratios can give you an idea of how fundamentally fit a given company is overall. Here are some other ratios to consider.

PE Ratio – This ratio compares the price of the stock with the company’s earnings.

Price to Book Ratio – This looks at the stock’s price compared to its assets.

Gordon Growth Model - This looks at the company’s future dividends.