Price to Sales Ratio Calculation

Evaluating the stocks of a particular company is required before you jump with both legs into investing with it. There are many tools regarding the evaluation of companies that depend on their earnings.

However, there are companies with negative earnings. This doesn't make them bad investments. These companies lack a history of generating earnings to their stockholders. If you have chosen such a company you should evaluate and deal with it extremely carefully.

The 1990s are not so far away when many new companies appeared lured by the Internet advent. These companies lacked the history of making money, but nevertheless many of them now make a lot of money to their shareholders.

So, a measurement of the worthiness of young companies just coming on the market is needed. These companies should not be overlooked.

The Price to Sales (P/S) ratio comes to our assistance. This ratio provides a relationship between the current price of the stock and the total sales per share of the company. The P/S of a company can be calculated by using one of the two formulas:

Formula 1:

P/S = Market Cap / Total Revenues

Formula 2:

P/S = Stock Price / Sales Price per Share

The results you get from the formulas above represent the value that the market assigns to the particular stock.

The lower the result you get is, the higher the value the market places on the stock. Nevertheless, you should never forget that the P/S is just one piece of the whole picture. When dealing with a young company many other factors should be considered, which may have an effect on the value of the stock. 

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