# Price-to-Sales Ratio (P/S)

## What it is:

The price-to-sales ratio helps determine a stock’s relative valuation. The formula to calculate the P/S ratio is:

P/S Ratio = Price Per Share / Annual Net Sales Per Share

## How it works (Example):

Let's assume Company XYZ reports net sales of \$5,000,000 and it currently has 500,000 shares outstanding. The stock is currently trading at \$20.

Sales per Share = (5,000,000/500,000) = 10

Price-to-Sales Ratio = 20/10 = 2

Now we want to compare XYZ to one of its competitors, Company ABC.

ABC also reports net sales of \$5,000,000 and it also has 500,000 shares outstanding. The stock is trading at \$100.

Sales per Share = (5,000,000/500,000) = 10

Price-to-Sales Ratio = 10/10 = 10

Investors in ABC are willing to pay \$10 for \$1 in sales, while investors in XYZ are willing to only pay \$2 for \$1 in sales. Any number of scenarios could explain this discrepancy, so it's important to know what makes ABC stock so much more appealing. If you can't find a good reason, perhaps stock XYZ is undervalued, and represents a good bargain.