**Definition:**Price to Sales Ratio (PSR or P/S ratio) is calculated by dividing the company's market cap by the company's revenue; or, dividing the stock price per share by the revenue per share. It indicates how much investor paid for a share compared to the sales generated (per share) by the company. A lower ratio is considered a better investment as the investor is paying less for each unit of sales.

**Formula:**

Price to sales ratio = Market price per share / Sales per share

Or,

PSR = Market Capitalization / Total sales

**Example 1:**

If a company has a market cap of $20 million and revenue of $10 million. Then, the P/S ratio = 20 million / 10 million = 2

**Example 2:**

A corporation with sales per share of $35 and a share price of $105 would have a P/S ratio of 3 (Calculation: 105 / 35 = 3). This means that investors pay $3 for every dollar of sales that the corporation generates.

**Example 3:**

Wayne Ltd has sales of $20 billion and the stock has a total market capitalization of $18 billion, then the Price to sales ratio for Wayne Ltd is: 18 billion / 20 billion = 0.9

**Another example:**

**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**

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

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

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

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

## Why It Matters:

*is considered a relative valuation measure because it's only useful when it's compared to the P/S ratio of other firms. The P/S ratio varies dramatically by industry. For example, retail companies typically display a much higher P/S ratio than companies highly involved in research and development.*

**Price-to-sales ratio**
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