Price to Sales Ratio

The Price to Sales Ratio is a high-level measure of the investment quality of a company.  The price to sales ratio of a company is usually calculated on a per share basis.  The calculation of price per share for a company is as follows:

Stock Price per Share / Revenues per Share

The concept of revenues per share is relatively new, and became important during the Internet Dot Com boom.  The use of revenues can be misleading, since they are not a good indication of the profitability of the company.  The revenues per share were often calculated for companies that had not yet created profits, making the calculation of earnings per share impossible.

A price to sales ratio below 1.0 is considered desirable; however, serious consideration should be given to the limitations of this measure.