Price-to-sales ratio

A price-to-sales ratio, or a stock's market price per share divided by the revenue generated by sales of the company's products and services per share, may sometimes identify companies that are undervalued or overvalued within a particular industry or market sector.

For example, a corporation with sales per share of $28 and a share price of $92 would have a price-to-sales ratio of 3.29, while a different stock with the same sales per share but a share price of $45 would have a ratio of 1.61.

Some financial analysts and money managers suggest that, since sales figures are less easy to manipulate than either earnings or book value, the price-to-sales ratio is a more reliable indicator of how the company is doing and whether you are likely to profit from buying its shares.

Other analysts believe that steady growth in sales over the past several years is a more valuable indicator of a good investment than the current price-to-sales ratio.