Glossarytaught in M3.06, M5.04
Price to sales
Also called P/S, price sales ratio.
Market capitalisation divided by revenue. Used where earnings are negative or meaningless, most often for young companies.
Valued at ₹12,000 crore on ₹4,800 crore of revenue, a company trades at 2.5 times sales.
Its defect is that it ignores profitability entirely, and revenue with no path to margin is worth nothing. Two businesses on the same sales multiple, one with 20% gross margins and one with 70%, aren't comparably valued.
Using enterprise value instead is more defensible, since revenue belongs to lenders as well.
Always ask what margin the multiple assumes.