Formula
PSR = market cap ÷ annual sales = price ÷ sales per share
With a market cap of KRW 2 trillion and annual sales of KRW 1 trillion, the PSR is 2.
Definition
PSR (price to sales ratio) is market cap divided by annual sales, showing what multiple of the company's sales the market is valuing it at. On a per-share basis it is the same as the share price divided by sales per share. A PSR of 2 means the market values the company at twice its annual sales.
PSR differs from PER in that it can also be used for companies that do not yet make a profit. A loss-making company has negative net income, so PER cannot be calculated, but it still has sales, so a PSR can be. That is why it is often read alongside when gauging the price of growth companies whose profits are still thin.
Jupick does not put PSR directly into the grade, but treats it as a supporting yardstick for reading the price level where PER does not work. Sales are less swayed by accounting treatment than profit, so they can be a relatively stable denominator for companies with erratic earnings.
How to read it
A lower PSR amounts to acquiring the same sales at a lower price, but PSR alone does not show how much of those sales turns into profit. When sales are large but profit is thin, a low PSR may not mean the price is low.
PSR becomes meaningful when comparing companies with similar margins. When margins differ widely, the same PSR can reflect different real value, so net margin and operating margin need to be read alongside.
The normal range of PSR varies widely by sector. High-margin software tends to sit high and thin-margin distribution low, so comparisons within the same sector are accurate.
Points to watch
- PSR looks only at sales, not profit. How much of sales is left as profit requires reading net margin and operating margin as well.
- Normal ranges differ widely by sector, so PSR is hard to compare across sectors as is.
- Sales are in some ways easier to inflate than profit, so the quality of sales (cash collection, whether they are one-off) needs checking too.