What is p/s ratio? Formula of p/s ratio.

     P/S ratio or price to sales ratio is an important financial ratio and p/s ratio playys an important role in fundamental analysis of any stock. This post is all about p/s ratio like 'what is p/s ratio?','how to analyze p/s ratio?','formula and problem of p/s ratio'.

What is p/s ratio?

       From p/s ratio we come to know how much people (buyer) pay on the basis of sales? If any company's p/s ratio is 3, it means people are paying 3 rs for company's 1 rs(rupees) sale.similiarly, if any company's p/s ratio is 5 then buyer are paying 5 rs for company's 1 rs sale. At all it means this company's market cap (capitalization) is 5 X more than its sales.

What is p/s ratio

      If p/s ratio of any company's stock is less, it means either the stock is undervalued or investors have not faith of its future growth. Similiarly, if p/s ratio of any company's is not less than other same industry's company, means it is overvalued or investors have faith of its future growth.

Formula of p/s ratio:

Formula of p/s ratio

P/S (price to sales) ratio
= {share price/(sales/no. of share)}
[you can get 'sales' from company's profit & loss statement and No. of shares =(Market cap/share price)]
={(share price * no. Of shares)/ sales}
= Market cap/sales

How to analyze p/s ratio?

      If you want to check any stock's p/s ratio is high or low then you have to compare the stock's p/s ratio with same industry's stock's p/s ratio.

      Profit margin means how much revenue converts into profit. Assume' P' company's profit margin is 20% and its revenue 100 crores rs. So this company generates 20 crore rs profit from its 100 crore rs revenue.

       Profit margin depends on each different industry. Like IT and Financial service company's profit margin is more than other company. Because this companies can convert its most revenue into profit. So to campare p/s ratio always use same industry's company's p/s ratio.

Use of p/s ratio:

     Generally we use p/s ratio for loss making company. Beacause we can not calculate p/e ratio of this stock(as it is loss making company and has no profit). So in this situation p/s ratio is used.

      If it seems that the falling of  any stock's share price is temperally and it can come back in its glorious position again in future then you can use p/s ratio.

    Many investors think that it is simply possible to manipulate share price but it is hard to manipulate sales.

Problems of p/s ratio:

      The main problem of p/s ratio is that it can not describe profit though any company generates revenue or sales. Profit depends on that much company converts sales into profit.

       So before investing you should prepare a checklist where all the question or points are noted. It helps to choose the right decision when you do stock analysis. This points will be  increased on the basis of knowledge. Do not depend two or three financial ratios like p/e,eps,p/s etc. Do also fundamental and management analysis.

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