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Definition: Price-To-Sales Ratio - PSR
It is considered as one of the valuation Ratios that is used to compare stock price of any company to the revenue it’s generates. It acts as a good indicator for the price one is paying for the stock foe each dollar of the revenue that company is making. It is calculated by company’s stock price by sales per share aggregated over one year. If someone wants to compare companies belonging to same sector this ratio gives the best insight.
If the obtained value is low then it is a good sign as it indicates that the company is possibly undervalued. On the other hand if the value of the ratio is greater than industry average, it is a sign of overvaluation which is not good at all. This ratio is also called Sales multiple / revenue multiple.
Generally sales of past four quarters (12 months)/current fiscal year/ongoing fiscal year is used to calculate PSR. If current year’s forecasted sales are considered to calculate Price-to-sales ratio then it is also called a forward ratio.
Consider following data for a company XYZ:
Fiscal year 1 (FY1) are actual sales while Fiscal year 2’s sales are forecasted. XYZ has 100 outstanding shares and share price is $10
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