The price-to-sales (P/S) ratio is a simple way to see how much investors pay for each rupee of a company's sales. It is calculated by dividing the stock’s market price by the company’s sales per share. This ratio helps you understand if a stock is expensive or cheap compared to its sales. A lower P/S ratio may mean the stock is undervalued, while a higher P/S ratio could mean it is expensive.
What is the Price-to-Sales (P/S) Ratio?
The P/S ratio shows the relationship between a company’s market value and its total sales. It tells you how much investors are paying for each rupee the company earns in sales. This ratio is useful especially when companies have no profits or inconsistent earnings. It gives a clearer picture of value based on sales, which are harder to manipulate.
How is the P/S Ratio Calculated?
The P/S ratio is calculated by dividing the stock price by sales per share. Formula:
P/S Ratio = Market Price per Share ÷ Sales per Share
You can find sales per share in the company’s financial reports or annual statements. This simple formula helps compare companies within the same industry easily.
How to Use the P/S Ratio to Evaluate Stocks?
Use the P/S ratio to compare companies in the same sector. A lower P/S ratio often means a stock is cheaper compared to sales. But a very low ratio might also signal problems in the company. A higher ratio can mean strong growth expectations or overvaluation. Combine P/S ratio with other ratios like P/E and debt levels for a better view. It is useful when companies do not have profits, so earnings-based ratios don’t work well.
What Are the Limitations of the P/S Ratio?
The P/S ratio does not show if a company is profitable, only its sales. Companies with high sales but big losses can still have a low P/S ratio. It ignores expenses, debts, and future growth potential. Also, comparing companies from different industries using P/S is not useful. So, use it with other financial data for a complete picture. Don’t rely on it alone to make investment decisions.
How to Find P/S Ratio for Indian Stocks?
You can find the P/S ratio on many financial websites and stock apps. Most stock brokers provide this data in their research reports. Company annual reports also list sales, which you can use to calculate it manually. Popular websites like Moneycontrol, NSE India, and BSE India offer this information easily. Checking P/S ratios regularly helps track stock valuation and spot buying opportunities.
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