Definition

The Median Price to Sales (PS) Ratio is a financial metric used to evaluate the relative value of a company's stock by comparing its market capitalization to its total sales or revenue. It provides insight into how much investors are willing to pay per dollar of sales.

Formula

Median PS Ratio = Market Capitalization / Total Sales

How to use the valuation method

The Median PS Ratio is used to assess whether a stock is overvalued or undervalued compared to its peers or historical averages. A lower PS ratio may indicate that a stock is undervalued, while a higher ratio could suggest overvaluation. Investors often compare the PS ratio of a company to the median PS ratio of its industry or sector to make informed investment decisions.

Which industries it work best in

The PS ratio works best in industries where companies have consistent and predictable revenue streams, such as retail, consumer goods, and technology. These industries often have stable sales figures, making the PS ratio a reliable indicator of value.

Which industries it does not apply to and why

The PS ratio may not be as applicable in industries with volatile or unpredictable sales, such as biotechnology or mining, where revenue can fluctuate significantly due to factors like regulatory approvals or commodity prices. In these industries, other valuation metrics might provide more accurate insights.

Summary

The Median Price to Sales Ratio is a useful tool for evaluating a company's stock value relative to its sales. It is particularly effective in industries with stable revenue streams but may be less reliable in sectors with high sales volatility. By comparing a company's PS ratio to industry medians, investors can gauge whether a stock is potentially overvalued or undervalued.