The valuation ratio that still works when profits don’t exist yet. Enter market cap and annual revenue — or share price and sales per share — to get the P/S ratio.
Or use per-share numbers instead:
Answer first: the price-to-sales (P/S) ratio tells you how many dollars the market charges for each dollar of a company’s annual revenue. Divide market cap by annual revenue — or share price by sales per share; the result is identical. A company valued at $5 billion with $1.25 billion in sales trades at a P/S of 4: investors are paying $4 for every $1 of yearly revenue.
P/S ratio = market cap ÷ annual revenue = share price ÷ sales per share
Example: $5,000M market cap ÷ $1,250M revenue = 4.0x. Flip it over and every $1 invested “buys” 25 cents of annual sales.
The P/E ratio is useless when the E is negative — and young growth companies routinely lose money for years while revenue is compounding fast. Sales are also harder to massage than earnings: revenue recognition has rules, while reported profit can be shaped by one-off charges, buybacks and accounting choices. That makes P/S the go-to yardstick for unprofitable growth stocks, turnarounds where earnings are temporarily crushed, and cyclicals at the bottom of their cycle.
| P/S ratio | Rough read | Typical of |
|---|---|---|
| Under 1x | Low — a dollar of sales for less than a dollar | Retailers, grocers, distributors |
| 1–2x | Moderate | Mature industrials, banks |
| 2–5x | Rich — growth or fat margins expected | Branded consumer, healthcare |
| 5–10x | Expensive — high growth priced in | Software, semiconductors |
| Over 10x | Very expensive — a lot must go right | Hyper-growth names |
The single biggest driver of a “fair” P/S is profit margin. A dollar of software revenue can carry a 30% profit margin; a dollar of supermarket revenue might carry 2%. That is why a software firm at 8x sales can be cheaper, properly measured, than a grocer at 1x. Comparing P/S across industries without adjusting for margins is the classic beginner mistake with this ratio.
Reality check: revenue is not value — companies have grown sales for a decade while burning cash the whole way. A low P/S with shrinking sales and no path to profit is a trap, not a bargain. Always pair P/S with margins and cash flow. Educational tool only — not financial advice.
Round out the picture with the P/E calculator, price-to-book calculator, earnings yield calculator and market cap calculator, or learn the framework in fundamental analysis basics.
Last updated July 2, 2026 · Written by Mustafa Bilgic. Educational only — not financial advice.
Divide the company's market capitalization by its annual revenue, or the share price by sales per share. A $5B company with $1.25B of revenue has a P/S of 4.
It depends heavily on margins and growth. Under 1x is traditionally considered cheap, 1-2x moderate, and above 5-10x demands strong growth or unusually high profit margins to justify.
P/S works when earnings are negative or distorted, which makes it the standard ratio for unprofitable growth companies, turnarounds, and cyclicals at the bottom of their earnings cycle.
Revenue says nothing about profitability. A low-margin business deserves a much lower P/S than a high-margin one, and sales growth without a path to profit can destroy value.