P/S (Price-to-Sales)

P/S in its simplest form

Price-to-Sales (P/S) is the most fundamental valuation multiple: 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: it works for companies without profit (early growth companies, biotech, restructuring candidates) where P/E is meaningless. Weakness: a krona of sales at 50% gross margin is worth far more than a krona at 5% gross margin. P/S ignores this completely. That is why 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: Share price / Revenue per share. Measured as a multiple (times). P/S 2 = you pay 2 kronor per krona of sales.

Why P/S is used for growth companies

Growth companies often burn money in early stages — they invest in R&D, sales & marketing, and expansion. This produces a negative result, making P/E unusable. P/S solves this by looking only at the revenue level. Sinch in 2018-2020 was a textbook example: negative profit, but revenue growing 50%+ annually. Investors used P/S to value the company. Spotify has had close to zero profit throughout its listed career, but P/S has been the primary valuation anchor. Likewise Tesla in 2012-2018. P/S gives a reference point when traditional multiples fail. But it is a crude proxy — it says 'how much is the market paying per krona of sales' without asking 'how profitable is that sale?'. This is where the big trap lurks: companies with high P/S and low margins are overvalued even if growth is strong.

💡 INSIGHT

P/S is especially useful for early growth companies where P/E is negative. But it ignores margins — always use P/S × margin (or EV/EBITDA) as a complement.

Historical normality — what is the 'right' P/S?

There is no universal 'right' P/S — it depends on industry, growth phase, and margins. General guidelines: industrial and manufacturing companies 0,5-1,5x (Atlas Copco ~3x is a premium), retail 0,3-1,0x (H&M ~0,7x), software and SaaS 5-15x (profitable SaaS a premium, unprofitable higher), banks 1,5-3x, real estate 1-3x (depends on rental yield), biotech without an approved product 10-50x (speculative). The AKM1 scale: P/S < 1 = score 5 (very cheap), 1-2 = score 4, 2-5 = score 3, 5-10 = score 2, > 10 = score 1. These thresholds are however general — a SaaS company with P/S 8 and 70% gross margin can be cheap; an industrial company with P/S 2 and 5% gross margin can be expensive. Context decides. The professional interpretation: always compare with the company's 5-year average and with direct competitors.

✓ TIP

Download 5 years of P/S history (available on e.g. Bloomberg, Refinitiv, or free on MSN Money/Yahoo Finance) and draw a graph. Companies whose P/S is below the 5-year average may be in a buying zone; above the average, a selling zone.

⚡ KEY INSIGHTS P/S = Market value / Revenue — the simplest valuation multiple Works for companies without profit (growth companies, biotech) where P/E is negative Industry-dependent: industrial 0,5-1,5x; retail 0,3-1,0x; SaaS 5-15x; biotech 10-50x P/S ignores margins — always use together with gross margin or EV/Sales 2

Why margins change everything

A krona of sales is not a krona of profit. Two companies with the same P/S of 2 can have fundamentally different value. Company A: revenue of 100 MSEK, gross margin 70%, EBITDA margin 30% → 30 MSEK EBITDA. You pay P/S 2 = 200 MSEK for 30 MSEK EBITDA → EV/EBITDA ~6,7 (cheap). Company B: revenue of 100 MSEK, gross margin 15%, EBITDA margin 3% → 3 MSEK EBITDA. You pay 200 MSEK for 3 MSEK EBITDA → EV/EBITDA ~67 (extremely expensive). Same P/S, completely different valuation! This is why professional analysts always relate P/S to margins. A rule of thumb: P/S / gross margin % should be below 5 for the company to be cheap. Company A: 2 / 0,70 = 2,9 — cheap. Company B: 2 / 0,15 = 13,3 — expensive. This adjustment transforms P/S from a crude proxy into a useful comparison.

💡 INSIGHT

P/S / gross margin = a 'margin-adjusted P/S'. Below 5 = cheap; 5-10 = normal; above 10 = expensive. This is one of the analyst's best tools for comparing companies with different business models.

EV/Sales — a better version of P/S

P/S has a critical weakness: it ignores liabilities and cash. Two companies with the same P/S of 2 can have completely different enterprise values. Company A: market value 200 MSEK, zero cash, zero liabilities → EV = 200 MSEK. Company B: market value 200 MSEK, 100 MSEK of liabilities → EV = 300 MSEK. For the same revenue of 100 MSEK, EV/Sales is 2,0 vs 3,0 — company B is 50% more expensive if you count the whole enterprise value. EV/Sales (enterprise value / revenue) corrects for this. Calculation: EV = Market value + liabilities − cash (incl. minorities). EV/Sales = EV / revenue. For companies with high liabilities (telecom, industrial, LBO) EV/Sales is always better than P/S. For companies with large cash holdings (Apple, Microsoft) P/S becomes more meaningful. As a rule of thumb: use EV/Sales for companies with a capital-intensive balance sheet; P/S for 'pure' equity valuations.

📖 DEFINITION

EV/Sales = (Market value + interest-bearing debt − cash) / Revenue. EV/Sales corrects P/S for capital structure — used by professional analysts as standard.

Industry-specific P/S patterns

Understand why different industries have different normal P/S. SaaS and software: 5-15x is normal due to 70-85% gross margin + scalability. A SaaS company with P/S 8 and 80% gross margin = P/S/margin = 10 (normal). Industrial: 0,5-2x due to 20-40% gross margin. Atlas Copco's P/S ~3,5 is a premium due to 50% gross margin (more high-margin service revenue). Retail: 0,3-1x due to 30-50% gross margin but low EBITDA margin (5-10%) due to rent and staff. H&M P/S ~0,7; ICA P/S ~0,5. Banks: P/S 1-3x due to financial leverage (revenue is 'net interest income', a fraction of the balance sheet). Real estate: 1-3x where companies with directly owned properties are valued via NAV, not P/S. Biotech without an approved product: 10-50x due to expected future revenue (speculative). Consumer goods (Diageo, Coca-Cola): 3-6x due to strong brands and high margins. Learn the industry normal — it is your reference point.

⚡ KEY INSIGHTS P/S / gross margin < 5 = cheap; > 10 = expensive (margin-adjusted P/S) EV/Sales corrects P/S for capital structure — better for indebted companies Industry P/S: SaaS 5-15x, industrial 0,5-2x, retail 0,3-1x, biotech 10-50x Two companies with the same P/S can have 10x different valuation due to margins 3