Price-to-Sales Ratio (P/S)

Price-to-sales is market cap divided by annual revenue — how many dollars of market value the company carries per dollar of sales. A $5B company doing $1B in revenue trades at 5x sales.

P/S is the go-to multiple when earnings do not exist yet. Pre-profit growth companies cannot be valued on P/E, but they all have revenue, so the market prices them on sales and an assumed future margin. That assumption is the whole game: 10x sales is defensible for software that can reach 30% net margins, and absurd for a grocer that tops out at 2%.

The 2020-2021 cycle made the lesson expensive — dozens of software names traded above 30x sales and then fell 70-80% when rates rose, without the underlying businesses shrinking at all.