Join Jim Stice for an in-depth discussion in this video Sales multiples, part of Finance Foundations: Business Valuation.
- Let's talk about the price-to-sales ratio, or P/S ratio,…sometimes called the sales multiple.…The P/S ratio is often used to estimate value…of new companies, companies that don't yet have net income…because of high startup cost.…The price-to-sales ratio is to find as follows.…Price-to-sales ratio equals the market value of the company…divided by sales.…Now let's perform some very sophisticated algebra…to get this equation.…The market value of the company is equal to sales…multiplied by the price-to-sales ratio.…You see, if I know the average price-to-sales ratio…of 10 companies in an industry,…then I can estimate a reasonable value for the 11th company…by multiplying the reported sales number of that company…by this industry price-to-sales ratio.…
Let's say that the companies in an industry…have an average P/S ratio of two.…This means that a new company in this industry…with sales of $8,000 would be worth…about $16,000, or two times its annual sales.…P/S ratios are lower than P/E ratios.…The simplest way to think of this is that a dollar…
Make sure to check out the Stice brothers' other accounting and finance courses to understand the other economic factors that impact your business.
- Using market, cost, and income approaches to business valuation
- Valuing homes
- Valuing companies by multiples
- Using price-to-sales ratios to value companies
- Using discounted cash-flow analysis to estimate value
- Valuing McDonald's as a case study