P/S Ratio (Price-to-Sales)

The P/S ratio compares a company’s value to its revenue, useful when earnings are thin or negative.

Common mix-ups

Sales are not profit; a low P/S can hide thin or negative margins.

Picture this

A delivery startup burns cash every quarter, so its P/E is meaningless — but it trades at 8 times revenue, and investors justify it with growth. A grocery chain also trades at 8 times sales, yet it is a mature, thin-margin business growing 3% a year. The two P/S multiples look identical and mean opposite things: one is a bet on explosive future profit, the other is a mature business priced for perfection. P/S is only a starting point; the margin story decides what the multiple is really saying.

How to apply it

Use P/S for early-stage or loss-making companies, then verify the path to profit and the gross margin. Compare P/S within the same industry, because software’s “normal” multiple looks nothing like a retailer’s.

What it means for you

It values sales directly, sidestepping distorted or absent profits.

A quick example

Key takeaway

The P/S ratio values a company against its revenue, which makes it the only usable multiple for pre-profit firms — but revenue says nothing about whether the business makes money. Two companies with identical P/S can have wildly different margins and futures, and a low P/S can hide thin or negative profitability. Use it for early-stage and loss-making companies, then verify the path to profit and compare within the same industry. Sales are not profit, and the ratio knows nothing about that gap.

Definitions reviewed by the Investing Glossary editorial team.