How price to sales works

Price to sales is the share price over sales per share:

$$\text{P/S} = \frac{P}{\text{SPS}} = \frac{\text{Market cap}}{\text{Sales}}$$

On a $50 share with $25 of sales per share, P/S is 2. With 100,000,000 shares, market capitalisation is $5,000,000,000 and total sales are $2,500,000,000. Divide those two and the ratio is 2 again.

The two routes are the same identity. Multiplying price and sales per share by the share count cancels, so market cap over sales cannot disagree with price over sales per share unless one of the three inputs is from a different date than the others.

The price to sales calculator on this page is both routes. How the P/E ratio works puts earnings in the denominator. This page puts sales in. A firm with no profit can still have a P/S. P/E against P/S is that pair.

Keep the $50 price and 100,000,000 shares. Cut sales per share to $10. P/S is 5. Market cap is still $5,000,000,000. Total sales are now $1,000,000,000.

The price did not move. The denominator did. A higher P/S here is a thinner year of sales, not a more expensive share. The first sheet's 2 times was the same $50 price on $25 of sales per share. Ranking those two sheets by P/S ranks the year of sales, not a change in what buyers paid.

Sorting a list by P/S low to high is a ranking of that ratio, not a bargain screen on its own. A distressed name can print a low P/S because the price collapsed faster than trailing sales.

Price $80, sales per share $16, shares 50,000,000. P/S is 5. Market cap is $4,000,000,000. Sales are $800,000,000.

The 5 matches the second sheet. The firm is smaller than the $5,000,000,000 first sheet. P/S hides scale the way P/E does. Put the share count back in before lining two names up.

How EV/sales works puts enterprise value over sales instead of equity. A gap between P/S and EV/sales is net debt, not a trading signal. Do not paste this $5,000,000,000 cap onto that operations sheet.

It is not a P/E. P/E divides by a year's profit. P/S divides by a year's sales. A high-margin firm can print a modest P/S and a high P/E at once, because sales are large and profit is a thin slice of them.

It is not a cash yield. Sales have not paid cost of goods, wages, tax or capex. How free cash flow works is further down the statement.

It is not EV/sales. Price to sales prices the equity residual. EV/sales prices the operations before asking who funded them.

When sales are zero the ratio stops working. Dividing a price by nothing does not produce a multiple anyone can spend. This calculator prints no P/S in that case rather than a nonsense figure. Zero sales is a description of the year.

A low P/S is common where margins are thin on purpose. It is not, on its own, a bargain. Compare it with the same firm over time, or with a rival doing the same work. Type the sales your sheet is using. Trailing sales and next year's sales are not interchangeable.

It is not a P/E, not an EV/sales engine, and not a claim that 2 times is cheap or dear. The three sheets are a $50 share on $25 of sales per share (P/S 2, sales $2,500,000,000), the same price on $10 of sales per share (P/S 5, sales $1,000,000,000), and an $80 share on $16 of sales per share (P/S 5, cap $4,000,000,000, sales $800,000,000). This is educational material, not financial advice.