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Canny Trading » Price-to-Sales (P/S) Ratio Calculator

- July 15, 2023

The Price-to-Sales Ratio Calculator is a handy tool for investors seeking to evaluate a company’s financial health. By analyzing the Price-to-Sales (P/S) ratio, you can gain valuable insights into the relationship between a company’s market capitalization and its annual sales. This metric is particularly important in understanding the potential profitability of the company.

In this article, we’ll delve into the price-to-sales ratio and lay out the steps to compute it.

Like the Price-to-Earnings ratio, the P/S ratio comprises two key components: the company’s current market price per share (P), and its Revenue Per Share (RPS). The P/S ratio is calculated by dividing the market price per share by the RPS. This ratio provides insights into how much an investor is willing to pay for each dollar of a company’s sales.

Take, for instance, a P/S ratio of 2. This suggests that investors are prepared to pay $2 for each $1 of the company’s sales.

You can access the current market price of a company’s stock in our Price-to-Sales Ratio Calculator by simply typing in the company’s ticker symbol. The latest stock price will be displayed. Alternatively, if you already have the current market price, you can opt to input it manually.

Revenue Per Share (RPS) is a ratio that shows the amount of a company’s revenue assigned to each existing share of common stock. It calculates total revenue by the number of outstanding shares, providing a per-share perspective on the company’s revenue.

In the calculator, if you use the company’s ticker symbol to gather stock information, the RPS retrieved will be the latest available. However, if you possess a specific RPS figure, you can manually input it.

Once you have both the current stock price and the RPS (either gathered or manually inputted), you’re ready to compute the P/S ratio. Simply press “Calculate P/S Ratio,” and you’ll instantly receive your result.

The P/S ratio, unlike the P/E ratio—a profitability measure—, is a tool that doesn’t take into account whether a company is making a profit. This feature makes it particularly useful for companies that have yet to stabilize their earnings but have promising sales.

The ideal P/S ratio can vary greatly among different industries, as they each employ distinct financial structures and business models. However, a common rule of thumb suggests that a P/S ratio under 1 may point to an undervalued company, signaling a potential opportunity for investors. On the other hand, a P/S ratio exceeding 3 might imply overvaluation, urging investors to tread carefully. Nevertheless, these figures should not be considered in a vacuum, as they form only part of the broader financial context.

In well-established industries like retail or manufacturing, a lower P/S ratio—close to or less than 1—might be deemed favorable. This is due to their business model which typically involves high volume and low margins. In contrast, tech start-ups or high-growth companies might command higher P/S ratios, sometimes surpassing 3. These businesses may have a unique growth trajectory and margin profile. They might not generate high revenues today, but investors are betting on substantial revenue growth in the future.

It’s essential to remember that the P/S ratio should not be used alone. Instead, it should be paired with other financial metrics to gain a holistic view of a company’s financial health. For example, a company with a low P/S ratio might seem appealing, but if it’s not profitable or burdened with debt, the perceived ‘value’ could be deceptive. Similarly, a high P/S ratio might appear pricey, but it might well be justified if the company is in a high-growth phase or operates within a booming industry.

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