V04: P/S (Price-to-Sales) — how to analyse it

P/S works for growth companies without profit (common among small companies). P/E does not work when EPS is negative. P/S shows whether the company is cheap or expensive regardless of profit.

This is V04 — P/S (Price-to-Sales) in the AKM1 model: one of the 20 variables that together determine whether a company is an institutional quality stock or a collection of stories. In this article you get the variable explained, how to compute it yourself, and how three of history's greatest investors would have interpreted it.

Why the variable exists

P/S as a valuation metric is relatively young compared with P/E and P/B. It became seriously established only in the 1960s when institutionalised investors began analysing early tech companies without profit. Benjamin Graham (Security Analysis, 1934) mentioned P/S in passing but considered it secondary — he focused on P/E and P/B for 'cigar butt' investments. It was only in the 1980s biotech boom that P/S became mainstream, when companies like Amgen and Genentech had zero profit but strong revenue forecasts. In the dot-com era (1995-2000) P/S was overused — analysts justified P/S 50+ with 'new economy' arguments, which led to one of history's greatest bubbles.

What P/S is and why it is needed

P/S in its simplest form Price-to-Sales (P/S) is the most fundamental valuation multiple: the market value divided by revenue. If a company is worth 1 000 MSEK on the stock exchange and has revenue of 200 MSEK annually, P/S = 5. You pay 5 kronor for every krona of sales the company makes. P/S is value-neutral — it says nothing about profit, margins, or cash flow. That is both its strength and its weakness. Strength: works for companies without profit (early growth companies, biotech, restructuring candidates) where P/E is meaningless. Weakness: a krona of sales when the gross margin is 50% is worth far more than a krona when the gross margin is 5%. P/S ignores this completely. Therefore the course's analytical insight says: P/S alone is meaningless — it must be combined with margins to become meaningful. 📖 DEFINITION P/S = Market value / Net revenue. Alternatively: take the stock's share price and divide by revenue per share. Measured as a multiple (times). P/S 2 = you pay 2 kronor per krona of sales.

Computing and interpreting P/S in practice

Find the data in the annual report To compute P/S you need two numbers: market value and net revenue. Market value = share price × number of stocks. You fetch the share price from the stock exchange (real time or historical closing price). You find the number of stocks in the balance sheet's equity section, usually under 'Share capital' or in note 1 'Accounting principles' / note on 'Stocks'. Note: use the diluted number of stocks (incl. all outstanding options, conversions, subscription rights) — that gives true P/S. Many sources (Bloomberg, Refinitiv) automatically report diluted. You fetch net revenue from the income statement, the first line. Choose the latest year — or better: trailing twelve months (TTM), which is the last 12 months rolling. TTM gives a more current picture than an annual report that can be 3-9 months old.

Three perspectives on P/S (Price-to-Sales)

Peter Lynch: Lynch used P/S extensively to find 'fast growers' not yet profitable. He compared P/S with the historical average and the industry — a P/S below 1x for a company where growth is 20% was a red flag (too good to be true) or an opportunity. Lynch's 'PEG-ratio' (P/E / growth) was a further development of P/S thinking.

Benjamin Graham: Graham rarely used P/S — he preferred P/E and P/B. But he argued that P/S below 0.5x (companies selling for less than half of revenue) were often 'cigar butt' opportunities — a last drag for free. Graham's 'defensive investor' screen: P/S < 1.5x combined with P/E < 15.

AK1's interpretation: AKM1 weight 6%. P/S is the starting point of valuation, not the end. We combine P/S with gross margin (V07) — a company with P/S 1x and gross margin 20% is more expensive than P/S 3x and gross margin 80%. AKM1 normalises P/S against margins to compare companies across industries.

Go deeper

From single multiples to triangulation

Want to practise with worked examples, chapter by chapter? The course P/S (Price-to-Sales) (V04) contains 6 chapters, Lynch and Graham perspectives and how AK1 uses the variable in the wave matrix. See also the complete guide to Swedish stock analysis for how all 20 variables fit together.

FAQ

What is P/S?

P/S (Price-to-Sales) is a valuation multiple that relates the company's market value to its net revenue. A P/S of 2 means you pay 2 kronor per kronor of sales. The multiple is value-neutral — it says nothing about profit or margins, which is both its strength and its weakness.

When is P/S used instead of P/E?

P/S fungerar när P/E inte gör det: för tillväxtbolag utan vinst, där resultatet är negativt eller mycket volatilt. Eftersom omsättningen alltid är positiv kan P/S användas för bolag i tidigt skede, omstruktureringskandidater och cykliska bolag i botten av konjunkturen — men alltid med marginalerna som motvikt.

How do I calculate P/S?

P/S = marknadsvärde / nettoomsättning. Marknadsvärdet är aktiekurs × antal aktier (använd utspädat antal för en riktigare bild), och nettoomsättningen hittar du på första raden i resultaträkningen. Kursen P/S (Price-to-Sales) (V04) innehåller genomgångna exempel på beräkningen.

Is a low P/S always cheap?

No — that is the classic misconception. A krona of sales at a 50% gross margin is worth far more than a krona at 5% — low-margin businesses logically warrant a lower P/S. That is why the AKM1 model normalises P/S against the gross margin before the multiple is compared across companies and industries.

This is educational financial analysis, not investment advice.