Understanding Market Capitalization to Sales Ratio

Market Capitalization to Sales Ratio is a valuation metric that compares the current price to its total sales. This metric is convenient to understand how the market is pricing every rupee sale of the company. It utilizes a company's market capitalization and revenue to determine whether the stock is rightly valued or not. A low Market Capitalization to Sales Ratio is considered an underrated stock, and a higher ratio is considered an overrated stock.

The formula to derive Market Capitalization to Sales Ratio



Market Capitalization - It is also commonly known as a market cap, and it refers to the market value of the company's outstanding shares. It is calculated by multiplying total shares outstanding by the current market price of the single share.

Total Sales - It is a sum of total sales revenue generated by the company from its operations, and it is found in the company's Income Statement.

Example of Market Cap to Sales Ratio: Tech Mahindra reported market capitalization as Rs. 146071.51 Cr. And total sales as Rs. 37855.10 Cr.
The value as per the formula (Market cap to sales = Market Capitalization / Total Sales) is calculated as (146071.51 / 37855.10) = 3.86.

---

Key Highlights

The Market Capitalization to Sales Ratio is calculated as the Market Capitalization divided by Total Sales.

It indicates how the market is pricing every rupee sale of the company.

The lower the Market Cap to Sales ratio, the better it is.

---

While looking at the Market Cap to Sales Ratio, the following points should also take into consideration:

A low Market Capitalization to Sales ratio below one or two is generally considered good. The lower the ratio, the better it is.

Many investors used this metric as the company's profits are easy to manipulate, but sales are hard to manipulate.

It tells how the market is pricing every rupee sale of the company. And it also indicates how much investors are paying for the company's stock compared to total sales.

Many analysts used the Market Capitalization to Sales ratio as complementary to reduce the distortions that come with the earnings while analyzing the company.

---

How to use Market Cap to Sales Ratio effectively

Investors should look for a lower Market Cap to Sales Ratio. It indicates that the company is undervalued.

Market Cap to Sales Ratio is helpful to evaluate growth companies that are still young in the industry and not yet profitable. And it is also useful for the company's valuation that is incurring losses.

Always compare companies that operate in the same industry. And while analyzing companies Market Cap to Sales Ratio, also check its historical data to know the past performance of the company and also check other relative financial metrics for better analysis like PB ratio, PE ratio, Price to Cash Flow from Operations, Enterprise Value by EBITDA, etc.,

---