Price-to-Sales (P/S) Ratio

Price-to-Sales (P/S) = Market Capitalization / Annual Revenue. Unlike the P/E ratio, P/S works for companies that aren't yet profitable because every company has revenue even when earnings are negative. It's especially popular for valuing high-growth software or biotech companies in early stages.

A low P/S ratio (below 1.0) suggests the market values the company at less than one year's revenue — potentially a bargain, or a sign of low margins. High-growth software companies often trade at 10–20x P/S, reflecting expectations of high future profitability. A SaaS company at 20x P/S with 50% revenue growth is arguably cheaper than one at 10x P/S with 5% growth.

Example: In 2021, Zoom Video Communications hit a P/S ratio above 70x at its peak — investors were paying $70 for every dollar of revenue. As growth decelerated and normalization set in, the P/S compressed to under 5x by 2023, wiping out most of the gains for late buyers.

BMInsider's 100X Insider Reports use P/S in combination with gross margin and growth rate to identify whether revenue-based valuations are justified by the underlying business economics.