From the course: Finance Foundations: Business Valuation

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Sales multiples

Sales multiples

From the course: Finance Foundations: Business Valuation

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Sales multiples

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- 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 costs. The price-to-sales ratio is defined 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…

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