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Price to Sales (TTM)

Price to Sales (TTM)

Price to sales compares the value of the company to its total sales over the last year. It's useful for companies with low or negative earnings, where P/E is less meaningful.

How it relates

Market CapitalizationMarket capitalization is the total value of all a company's shares at the current share price. It's a quick way to see how big the company is in the stock market.÷RevenueRevenue is the total amount of money the company earned from selling its products or services. It is the top-line number that reflects the overall size of the company's business.=Price to Sales (TTM)

Where it fits

Price to Sales (TTM)→Valuation

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.