What it measures
Price-to-sales (P/S) divides market cap by the last twelve months' revenue. A P/S of 5 means the market values the company at five times its yearly sales.
A close variant, EV/sales, uses enterprise value instead of market cap so that debt and cash are counted. See EV/EBITDA for how enterprise value works.
When it is useful
The P/E ratio (price-to-earnings) fails when a company has no earnings. Young, fast-growing companies often spend everything on growth and report losses. P/S still works because revenue exists even when profit does not.
Read it with margins
A dollar of sales is worth very different amounts to different businesses:
| Company | Gross margin | Fair P/S might be |
|---|---|---|
| Software, 80% margin, growing 30% | 80% | 8 to 15 |
| Retailer, 25% margin, growing 5% | 25% | 0.5 to 1.5 |
A high P/S is only reasonable when Gross margin is high and Revenue growth (TTM and forward) is strong, because those decide how much of each sales dollar can eventually become profit.
Caveats
- Revenue says nothing about whether the company will ever be profitable.
- Very high P/S (above 20) assumes years of fast growth with little room for disappointment.
- Compare within an industry.
See also
- P/E ratio (price-to-earnings) What the P/E ratio means, trailing versus forward P/E, what counts as high or low, and why P/E alone can mislead without growth.
- Gross margin What gross margin is, what it reveals about pricing power, typical ranges by industry, and why its trend matters as much as its level.
- Revenue growth (TTM and forward) How to read revenue growth, the difference between trailing (TTM) and forward growth, what counts as strong, and the deceleration warning sign.
- EV/EBITDA EV/EBITDA values a whole company, debt included, against its operating cash earnings. How enterprise value works and when to use it over P/E.
Pages that link here: Investing in IPOs
Last updated September 30, 2026. Education only, not investment advice.