How to use the price-to-sales calculator
The P/S & EV/Revenue tool takes amounts in millions of dollars:
- Enter the market value, either as market capitalization or as share price times shares outstanding.
- Enter revenue for the last 12 months. Add the last four quarters rather than using the last fiscal year if the year ended some months ago.
- Add a net profit margin (optional) to see the P/E that the revenue multiple implies.
- Enter total debt and cash from the latest balance sheet. These turn market value into enterprise value.
The Price from P/S tool works backwards: apply a revenue multiple, for example the average of similar companies, and get the implied share price.
The formulas
Enterprise value (EV) = Market capitalization + Total debt − Cash
EV/Revenue = Enterprise value ÷ Revenue
Implied P/E = P/S ÷ Net profit marginRevenue is the last 12 months. Market capitalization is the share price times diluted shares outstanding. Cash includes short-term investments.
A worked example
Company A is worth $12,000M on the stock market and had $4,000M of revenue over the last 12 months. Its P/S ratio is 3.00×, or $13.33 of revenue for each share.
It has $2,500M of debt and $500M of cash, so net debt is $2.00B. Enterprise value is $14.00B and EV/Revenue is 3.50×.
Company A keeps 12% of revenue as net profit, so its P/S is equivalent to a P/E of 25.0.
In the Price from P/S tool, an EV/Revenue multiple of 4 times on the same revenue gives an enterprise value of $16.00B. After $2,000M of net debt, the implied share price is $46.67, an upside of 16.7% from $40.
Why EV/Revenue is better for indebted companies
Revenue is produced by the whole business, which is financed by both shareholders and lenders. P/S puts only the shareholders’ part on top, so it makes heavily indebted companies look cheaper than they are. Three companies with the same market value and revenue:
| Company | Debt | Cash | P/S | EV/Revenue |
|---|---|---|---|---|
| A | $2,500M | $500M | 3.00× | 3.50× |
| B: heavily indebted | $8,000M | $500M | 3.00× | 4.88× |
| C: net cash | none | $3,000M | 3.00× | 2.25× |
On P/S they are identical. On EV/Revenue, Company B costs more than twice as much per dollar of sales as Company C, because a buyer of B also takes on its debt. When companies have different balance sheets, compare EV/Revenue.
Margins: what P/S hides
A dollar of revenue is worth only what the business can turn into profit. P/S ignores that, which is both its strength (it works when there are no profits) and its main weakness. At the same P/S of 3.00×:
| Net margin | Implied P/E |
|---|---|
| 4% | 75.0 |
| 12% | 25.0 |
| 25% | 12.0 |
A thin-margin company needs a far lower revenue multiple to be fairly priced than a high-margin one. That is why typical P/S levels differ so much between industries, and why a low P/S is only a bargain if margins can hold or improve. For a margin-aware multiple, use our EV/EBITDA calculator.
What this calculator does not include
- Growth. A company growing revenue 40% a year deserves a higher multiple than one growing 3%.
- Revenue quality. Recurring subscription revenue is usually valued above one-off sales.
- Other claims in EV. A full enterprise value also adds preferred stock, minority interests and, for many analysts, lease liabilities. Add them to debt if they are material.
- Diluted shares. Use the diluted share count, including options and convertible securities.