Price to Sales ratio (p/s)
What is Price to Sales Ratio?
The Price to Sales ratio is a valuation method that compares a company’s stock price to its revenue. This method is mostly used for companies that are not profitable.
The price to sales ratio is also known as a revenue multiplier or a sales multiplier.
How can Price to Sales ratio be used?
The P/S ratio is a key valuation ration for many analysts and traders that wish to understand a company’s worth. It basically answers the simple question of “Is this expensive to invest in or cheap?”.
The ratio shows how much investor are willing to pay per dollar for sales and it can be calculated either by dividing the company’s market capitalization by its total sales (over a given period of time) or on a per-share basis (Stock price/ Sales per Share).
Like most ratios, P/S is also best when comparing companies in the same industry. For example, when looking at cannabis stocks and you want to compare Canopy Growth (CGC) with Aurora Cannabis (ACB) or Tilray (TLRY).
A low P/S indicates a cheap or in other words an undervalue stock, whilst a high P/S indicates an expensive or an overbought stock.
To determine the P/S ratio, one must divide the current stock price by the sales per share. The current stock price can be found by plugging the stock symbol into any major finance website. The sales per share metric is calculated by dividing a company’s sales by the number of outstanding shares.
Where
MVS= Market Value per Share
SPS= Sales per Share
It is important to note, that P/S ration does not take into account debt loans, or the status of a company’s balance sheet, including the ability to make earnings. Which is why, the P/S ratio alone should not make traders or analysts rely solely their decision form this ratio.
Theoretical Example
Taking a step further, consider Canopy’s revenues of $399 million in 2020 and a P/S of 12 times. IN the same period Tilray traded at let’s say 7 which suggests that Tilray is comparably cheaper than Canopy Growth. Or that Canopy is extremely overbought compared to Tilray that might have more potential for upside.
