Price To Sales Ratio

The price to sales ratio (PSR) is computed as the Stock Price ÷ Sales Per Share. The price to sales ratio gained popularity among some analysts during the Internet bubble. They used the price to sales ratio to justify high stock prices for the many Internet companies with no earnings. But there are also more salutary reasons for using the price to sales ratio. Sales are less subject to accounting manipulation than earnings, so the price to sales ratio has this benefit over the better known price to earnings ratio. Some analysts also argue that a low price to sales ratio is a good indicator of firms with prospects of rapid price appreciation. Their reasoning is that, if a company has a low price to sales ratio, even a small increase in margins will significantly raise earnings per share. The price to sales ratio features significantly in the work of money manager James O'Shaughnessy, which argues that a stock with a low price to sales ratio and high "relative strength" (a measure of momentum) will outperform other stocks.