PRICE MULTIPLE

A PRICE MULTIPLE IS ANY RATIO THAT USES THE SHARE

PRICE OF A COMPANY IN CONJUCTION WITH SOME SPECIFIC
PER-SHARE FINANCIAL METRIC IN ORDER TO EVALUATE A
COMPANY IS FINANCIAL SITUATION.
THE SHARE PRICE IS TYPICALL DIVIDED BY A CHOSEN PER-
SHARE METRIC TO FORM A RATIO.

PRICE MULTIPLE = SHARE PRICE /PER SHARE METRIC

 WHAT IS PS RATIO???
THE PRICE-TO-SALES RATIO HELPS
DETERMINE A STOCKS RELATIVE
VALUATION. THE FORMULA TO
CALCULATE THE P/S RATIO IS:
P/S RATIO = PRICE PER SHARE /
ANNUAL NET SALES PER SHARE
Price to Sales Ratio Calculation

Example: assume $20 in market price per

share and $5 in sales per share.
Price to sales ratio = 20 / 5 = 4
This means that investors pay $4 for every
dollar of sales that a company generates.
 HOW IT WORKS???
LET'S ASSUME COMPANY XYZ REPORTS NET SALES OF $5,000,000 AND IT CURRENTLY HAS
500,000 SHARES OUTSTANDING. THE STOCK IS CURRENTLY TRADING AT $20.
SALES PER SHARE = (5,000,000/500,000) = 10
PRICE-TO-SALES RATIO = 20/10 = 2
NOW WE WANT TO COMPARE XYZ TO ONE OF ITS COMPETITORS, COMPANY ABC.
ABC ALSO REPORTS NET SALES OF $5,000,000 AND IT ALSO HAS 500,000 SHARES OUTSTANDING. THE
STOCK IS TRADING AT $100.
SALES PER SHARE = (5,000,000/500,000) = 10
PRICE-TO-SALES RATIO = 10/10 = 10
INVESTORS IN ABC ARE WILLING TO PAY $10 FOR $1 IN SALES, WHILE INVESTORS IN XYZ ARE WILLING TO
ONLY PAY $2 FOR $1 IN SALES. ANY NUMBER OF SCENARIOS COULD EXPLAIN THIS DISCREPANCY, SO IT'S
IMPORTANT TO KNOW WHAT MAKES ABC STOCK SO MUCH MORE APPEALING. IF YOU CAN'T FIND A
GOOD REASON, PERHAPS STOCK XYZ IS UNDERVALUED, AND REPRESENTS A GOOD BARGAIN.
 ADVANTAGES USING PS RATIO

SINCE THE SALES REVENUE IS ALWAYS POSITIVE, THE PRICE TO SALES RATIO IS MEANING FUL EVEN FIRM
IS IN DISTRESS

SALES REVENUE IS NOT AS EASY TO MANIPULATE OR DISTORY AS EPS AND BOOK VALUE, WHICH ARE
SIGNIFICANTLY AFFECTED BY ACCOUNTING CONVERSATION

P/S RATIOS IS NOT AS VOLATILE AS P/E MULTIPLE

FOR START-UP COMPANIES P/S IS AN APPROPRIATE MEASURE WHEREAS THE P/E MAY BE MISLEADING.
IT IS ALSO A VALUABLE TOOL FOR CYCLICAL OR MATURE INDUSTRIES
 DISADVANTAGES USING PS RATIO

IF FIRMS MADE SIGNIFICANT AMOUNT OF SALES ON CREDIT, THAT WILL INFLATE THEIR PRICE TO SALES RATIO,
BUT THAT DOES NOT NECESSARILY INDICATE OPERATING PROFITS AS MEASURED BY EARNINGS AND CASH
FLOW

FURTHERMORE, ANALYST SHOULD BE CAREFUL ABOUT THE REVENUE RECOGNITION PRACTICES THAT CAN STILL
DISTORT SALES FORECAST THUS P/S RATIO

P/S RATIOS CAN CAPTURE THE SALES PART, BUT IT CAN NOT CAPTURE THE DIFFERENCES IN COST STRUCTURE
ACROSS COMPANIES