|Price to sales ratio (P/S)|
Price to sales ratio (P/S)
Price to sales ratio is a less-used type of fundamental valuation indicator. This valuation focuses on total revenue.
To calculate this ratio, take the stock price and divide by the last 12 months revenue/share (12 month revenue per share is calculated by the last 12 month revenue combined divided by total number of shares outstanding). Price to sales ratio is generally only used for evaluating companies with volatile earnings.
Studies have shown that there is a correlation of low price to sales ratio's and good returns on those stocks.
These P/S numbers are categorized as follows;
Growth companies typically have high P/S numbers, therefore, it is advisable that the scale reflects each particular industry. This can be done by comparing P/S numbers for companies in the same industry group and will help determine how the scale should be altered.