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.

You may also want to use the price to sales ratio with the company’s growth. If a company has a very high P/S but is growing extremely fast it could be a worthwhile investment.