How to value a stock: Price-to-sales ratio (P/S) explained

Investing with moomoo joined discussion · Jun 18, 2021 18:25

How to value a stock: Price-to-sales ratio (P/S) explained

Investors are always seeking ways to compare the value of stocks.

In this article, we will walk you through one of the favorite ratios used by analysts in stock valuation so you understand what you are buying.

What is the price-to-sales ratio?

The price-to-sales ratio (or P/S) is calculated by taking a company's market capitalization and dividing it by the company's total revenue over the past 12 months.

Further reading: What is a market capitalization (AKA market cap)?

The lower the P/S ratio, the more attractive the company investment.

How the price-to-sales ratio works

As we are talking about stock valuation, one other important metric is the price-to-earnings ratio (or P/E) .

So, when should investors value stocks with P/S but not P/E?

P/S ratio can be applied in valuing growth stocks that have yet to turn a profit or have suffered a temporary setback.

Especially in the semiconductor industry and some other cyclical industries, many companies don’t generate any profits.

Why?

This reason why investors should use P/S for companies which are not earning profits yet is self-justifying. (To use P/E, you must first know companies’ earnings, which is the denominator in the formula)

If the P/S of the company we researched is lower than its peers, what does that mean?

If the P/S ratio is lower than comparable companies in the same industry that are profitable, investors might consider buying the stock as the target companies are undervalued by the market now.

All things being equal, a low P/S can indicate unrecognized value potential, while a very high P/S can be a warning red-flag.

How to find P/S ratio on moomoo?

Only a few people love doing math, and that's why moomoo has the figures ready for all investors.

1. On the stock quote page, click on a stock you are interested in.

2. Open the “Analysis” tab on top.

3. Open "Fundamental" -"PS".

Before performing fundamental analysis, please be aware that sales-based metrics are only part of the solution. Investors should consider multiple valuation techniques to value a company.