The price to sale ratio can be defined as a ratio that compares its stock price to the total revenues of that company. This ratio helps in the valuation of the stock of a company and shows the amount of value placed on the each dollar including in the revenues of the company. The calculation of the price to sales ratio can be done by dividing the market capitalization of a company by the amount of sales done by the company in twelve months of a particular financial period. In other words the price to sale ratio compares the stock value of the company against its total sales of that period instead of comparing it with the earnings of the company.
As explained earlier with the help of price to sale ratio we can calculate the amount of money paid by investors for each dollar of company. The formula of price to sale ratio can be shown as under:-
Price to Sales Ratio = Stock Price of company per share/ Net Sales of Revenue allocated per share
This ratio is used by the investors to compare the companies that lie in the same sector. The low degree of this ratio indicates that the company is suffering from possible undervaluation where as if the value of this ratio is above average it indicates that company is over valuated. Other names given to Price to Sales Ratio are Sales Multiple or the Revenue Multiple. While calculating this ratio one thing must be kept in mind that the price of stock or equity that is a numerator takes leverage in account where as sales that are denominator here does not take leverage into account.
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