Definition

The Mean Price to Sales (PS) Ratio is a valuation metric that compares a company's stock price to its revenues, providing insight into how much investors are willing to pay per dollar of sales.

Formula

Mean PS Ratio = Market Capitalization / Total Sales

How to use the valuation method

The Mean PS Ratio is used to evaluate whether a stock is overvalued or undervalued by comparing it to the average PS ratio of similar companies or the industry average. A lower PS ratio might indicate a potential undervaluation, while a higher ratio could suggest overvaluation.

Which industries it work best in

The Mean PS Ratio works best in industries where companies have consistent revenue streams and where profit margins are less volatile, such as retail or consumer goods.

Which industries it does not apply to and why

The Mean PS Ratio is less applicable in industries with high variability in profit margins or where revenue does not directly translate to profitability, such as technology startups or industries with high capital expenditure, because it does not account for costs or debt.

Summary

The Mean PS Ratio is a useful tool for assessing the relative valuation of companies based on their sales. It is most effective in stable industries with predictable revenue patterns but may not provide a complete picture in sectors with fluctuating profit margins or high capital requirements.