Technicals Stability Returns

## Understanding Price to Sales Ratio

The Price to Sales Ratio indicates how much investors are willing to pay for each rupee of sales generated by a company. A Price to Sales ratio is used to determine whether a stock is currently profitable or less profitable, which is helpful for better investment decisions. Here, price refers to the current stock price, and sales refer to annual sales or total revenue per share. Generally, a low price to sales ratio is considered an undervalued stock, and a high price to sales ratio is considered an overvalued stock.

The stock market expert, Mr. Kennet Fisher, developed the price to sales ratio. He was the first to define and use the price to sales ratio as a forecasting tool. He uses this ratio to analyse whether the stock is overvalued or undervalued.

The formula to derive Price to Sales Ratio

Current Price - It is the most recent selling price of stocks. The current price indicates the current value of the stocks, and it is also known as the market value.

Total Sales Per Share - Total Sales indicates how much a company's sales revenue is before deducting any expenses. Total Sales or Total Revenue is found in the company's Income Statement. Sales Per Share is calculated by dividing Total Sales by Total Outstanding Shares. It indicates how much a company generates in sales revenue on a per share basis.

Example of Price to Sales Ratio: For the financial year, the Bank of Baroda reported total sales per share of Rs. 88.56, and the current stock price is Rs. 103.40.
The value as per the formula (Current Price / Sales Per Share) is calculated as (103.40 / 88.56) = 1.68.

##### Key Highlights
The Price to Sales Ratio is calculated as the Current Price divided by Total Sales Per Share.

Price-to-sales (P/S) ratio below one or two is generally considered good. The lower the Price-to-Sales Ratio, the better it is.

It indicates how much investors are paying for the company's stock compared to total sales generated on a per share basis.

##### While looking at the Price to Sales ratio, the following points should also take into consideration:
For most industries, a Price to sales (P/S) ratio of below one or two is generally considered good. The lower the Price to Sales Ratio, the better it is.

It indicates how much investors are paying for the company's stock compared to total sales generated on a per share basis. For example, it shows how much investors are willing to pay for each rupee of sales made by the company.

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

While analysing the company, many analysts used Price to Sales as a complementary to reduce the distortions that come with earnings.

##### How to use Price to Sales Ratio effectively
Investors should look for a lower ratio. It indicates that the company is undervalued.

This metric is helpful to judge whether the company is overvalued or undervalued relative to its peers.

Generally, the Price to Sales ratio is used for companies that are currently not profitable or slightly profitable. For these kinds of companies, we cannot check the Price to Earnings (PE) Ratio because it is more reliant on companies' profitability. In this type of scenario, many investors used the P/S ratio.

It is also useful in a scenario like this, where a particular company goes into a loss for a temporary reason and we know that the company will grow in the future.

This metric is helpful in evaluating growth companies that are still young in the industry and not yet profitable.

Always compare companies that operate in the same industry. And while analyzing companies' Price to Sales ratio, also check their 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.,

##### Limitation
While analyzing the company, investors should keep in mind that the company runs on profits, not just sales. The price to sales ratio does not account for profit margins within a company. If a company's revenue is growing aggressively, then the price to sales ratio will look favorable. But if the profit margin is low, that means the company is not efficient in turning its sales into profits.
###### A low Price to Sales ratio can be due to:
The company's stock is genuinely undervalued.
Or investors do not have trust in future growth.
Sales are high relative to the current price.

###### A high Price to Sales ratio can be due to:
The Company's stock is overvalued.
It can be due to future projections.
Investors believe that the company's sales will increase.

#### Range Indicator of Price to Sales Ratio

Range Indicator Comments Screener at TSR
0 to 0.5 Strong Bullish Extremely Undervalued Yes
0.5 to 1 Bullish Highly Undervalued Yes
1 to 1.5 Mild Bullish Undervalued Yes
1.5 to 2.2 Neutral Rightly Valued Yes
2.2 to 4 Mild Bearish Overvalued Yes
4 to 6 Bearish Highly Overvalued Yes
Above 6 Strong Bearish Extremely Overvalued Yes

##### Related Price to Sales Screener
 Valuation Screener Price to Sales below 1 Price to Sales 2 To 5 Price to Sales 5 To 10

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