Price to Sales (TTM)

The price-to-sales ratio (P/S) compares a company's market capitalisation to its revenue over the trailing twelve months. This valuation metric is particularly valuable for evaluating companies with negative or highly volatile earnings, where P/E ratios are meaningless or unstable. Revenue is generally harder to manipulate than earnings, making P/S a more stable indicator.

The calculation can be done two equivalent ways:

P/S Ratio = Market Capitalisation / Total Revenue (TTM)
P/S Ratio = Share Price / Revenue Per Share (TTM)

For example, a company with a $5 billion market cap generating $2 billion in annual revenue has a P/S ratio of 2.5. Investors pay $2.50 for every $1 of sales.

Interpreting P/S varies dramatically by industry:

• Software/SaaS: P/S of 5-15+ is common due to high margins and recurring revenue
• Retail/groceries: P/S of 0.2-1.0 typical for low-margin, high-volume businesses
• Industrial: P/S of 0.5-2.0 for moderate-margin manufacturing
• Early-stage tech: P/S can exceed 20+ when profitability is years away

Key applications:

• Loss-making companies: P/S allows valuation when P/E is undefined
• Turnaround situations: Revenue may persist while earnings temporarily disappear
• Cyclical troughs: P/S remains meaningful when cyclical earnings collapse
• Cross-border comparisons: Revenue is more comparable than earnings affected by different accounting standards

Critical limitations:

• Ignores profitability: A company can have low P/S yet never turn profitable
• Margin differences: A high-margin business deserves higher P/S than a low-margin one with identical revenue
• Capital intensity ignored: Some businesses need massive investment to generate sales

Always compare P/S within industries and consider it alongside margin trends. A declining P/S might signal opportunity, or it might reflect deteriorating growth prospects or margin compression that the market has correctly identified.