Deep Dive: What Is the Price-to-Sales (P/S) Ratio — How to Calculate It and When It Matters Most for Investors
When Palantir Technologies trades at nearly 70 times its annual revenue while Walmart barely exceeds one times sales, the gap can seem absurd — until you understand what the price-to-sales ratio is actually measuring. The P/S ratio is one of the most intuitive valuation metrics in an investor's toolkit, and it becomes indispensable in exactly the situations where the more popular price-to-earnings ratio breaks down. With mega-cap growth stocks like NVIDIA commanding a P/S ratio above 24x ahead of its February 25 earnings report, and Salesforce trading at roughly 4x sales near its 52-week low, understanding how to interpret these numbers separates informed investors from those chasing headlines. The P/S ratio strips away the accounting complexity of earnings and asks a simpler question: how much are investors willing to pay for each dollar of revenue a company generates? This guide breaks down how to calculate the P/S ratio, what it reveals about different business models, where it works best, and — just as importantly — where it can lead you astray.