P/S Ratio (Price-to-Sales)
Valuing companies by their revenue when profits don't exist yet
Definition
The Price-to-Sales (P/S) ratio compares a company's market capitalization to its annual revenue. It shows how much investors pay for every dollar of the company's sales. The P/S ratio is especially useful for valuing early-stage or unprofitable companies that have no earnings to compare. A lower P/S ratio is generally better value; a high P/S means investors expect strong future growth.
Formula / Rules
P/S Ratio = Market Capitalization ÷ Annual Revenue
Example
A technology startup has a $2B market cap and $200M in annual revenue. P/S = $2B ÷ $200M = 10×. Investors are paying $10 for every $1 of revenue. At the height of the 2021 tech bubble, many software companies traded at 30–50× revenue. As interest rates rose in 2022, P/S multiples compressed dramatically.
Related Terms
Frequently Asked Question
What is the P/S ratio?
The P/S ratio divides market cap by annual revenue. It is used to value companies without profits, showing how much investors pay per dollar of sales. High P/S ratios imply high growth expectations.
APA Citation
Last updated:
· Source: VixShield Trading Glossary — From SPX Mastery by Russell Clark
⚠️ Not financial advice. This definition is educational content from the SPX Mastery book series by Russell Clark (VixShield). Past performance is not indicative of future results. Trading options involves substantial risk of loss and is not appropriate for all investors. Always paper trade before risking real capital.