Definition

Price to Sales Growth (PSG) Value is a financial metric used to evaluate a company's stock price relative to its sales growth. It helps investors assess whether a stock is overvalued or undervalued based on its revenue growth rate.

Formula

PSG = (Market Capitalization / Revenue) / Revenue Growth Rate

How to use the valuation method

To use the PSG valuation method, compare the PSG value of a company with its peers or industry average. A lower PSG value may indicate that the stock is undervalued relative to its sales growth, while a higher PSG value may suggest overvaluation.

Which industries it work best in

The PSG valuation method works best in industries with consistent and predictable revenue growth, such as technology or consumer goods, where sales growth is a key driver of company value.

Which industries it does not apply to and why

The PSG method may not apply well to industries with volatile or cyclical revenue patterns, such as commodities or financial services, because sales growth in these industries can be unpredictable and not necessarily indicative of long-term value.

Summary

The Price to Sales Growth (PSG) Value is a useful metric for evaluating stock valuation relative to sales growth, particularly in industries with stable revenue growth. It is less effective in industries with volatile sales patterns, where other valuation metrics may be more appropriate.