From the course: Running a Profitable Business: Revenue Recognition
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Using price-to-sales ratios
From the course: Running a Profitable Business: Revenue Recognition
Using price-to-sales ratios
- Let's talk about the price to sales ratio, or P/S ratio, sometimes called the sales multiple. As mentioned earlier in this course, this P/S ratio is often used to estimate values 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 the sales of the company. We can then perform some very sophistacted algebra on this expression to get the following equation. The market value of the company equals sales, multiplied by the price to sales ratio. So, if I know the average price to sales ratio of ten companies in an industry, then I can estimate a reasonable value for the eleventh company by multiplying its reported sales number by this industry price to sales ratio. Let's say that companies in an industry have an average P/S ratio of 2. This means that a new company, in this industry, with sales of $8,000, should be worth about…
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