price-to-sales ratio

A price multiple calculated by dividing a stock’s current share price by its sales per share. A company with $100 million in annual sales that sells for $15 per share and has 5 million shares of stock outstanding has a price-to-sales ratio of 0.75. Price-to-sales ratios are tied to expectations of future company growth, profitability and risk. The higher the expected growth, the higher the price-to-sales ratio that a stock can support. Higher profit margins should also translate into higher price-to-sales ratios. Price-to-sales ratios may identify undervalued firms sooner than the price-earnings approach and avoid some of the accounting complications of the price-earnings and price-to-book ratios. Price-to-sales ratios don’t apply to stocks of companies such as banks, real estate investment trusts (REITs) or other firms where ongoing sales are not the driving force. Industry knowledge is crucial: Some industries traditionally sell with low price-to-sales ratios.