Price to sales (P/S)
ValuationMarket cap as a multiple of the latest fiscal year's revenue.
Formula
P/S = market cap ÷ revenue
Why it matters
Revenue is the hardest line to fake and always exists, so P/S works when earnings-based multiples fail — loss-making growth companies, cyclicals at a trough, turnarounds. Its meaning depends entirely on margins: paying 2x sales for a business that can earn 25% net margins is paying 8x potential earnings; paying 2x sales for a 3% margin business is paying 67x. P/S is therefore best understood as a bet on future profitability.
What good looks like
There is no universal threshold — a healthy grocer trades below 0.5x sales while an excellent software company may deserve 8x. The useful comparisons are against the company's own history and against peers with similar margin structures. Multi-year revenue multiples above 10x have historically required extraordinary growth and margins to work out for buyers.
Caveats
Comparing P/S across different margin profiles is the classic beginner error — the ratio only ranks companies fairly within a peer group. It ignores debt entirely, flattering leveraged companies. For companies with volatile or pass-through revenue (distributors, energy traders), revenue itself is a poor base for valuation.