The P/S or P/E Ratio is a financial metric that measures how much investors are willing to pay for a company's earnings or sales. It can help investors to compare different companies and industries, and to identify potential opportunities or risks in the stock market.
The P/E Ratio divides the current share price by the earnings per share (EPS) of the company. It shows how much investors are paying for each dollar of profit that the company makes. A higher P/E Ratio means that investors have high expectations for the company's future growth and profitability, while a lower P/E Ratio means that investors are more cautious or pessimistic about the company's prospects.
The P/S Ratio divides the current share price by the sales per share (SPS) of the company. It shows how much investors are paying for each dollar of revenue that the company generates. A higher P/S Ratio means that investors value the company's sales more than its earnings, which could indicate that the company has a strong competitive advantage, a loyal customer base, or a high growth potential. A lower P/S Ratio means that investors value the company's earnings more than its sales, which could indicate that the company has low profit margins, high costs, or a declining market share.
Both ratios can vary widely depending on the industry, the market conditions, and the company's stage of development. Therefore, it is important to use them with caution and in context. Historical performance can suggest the right moment to buy or sell shares (when it is on all-time low or high values) and indicate the trajectory of business performance and how the market evaluates it.
Usually P/E less than 20 is considered low and indicates that the company is undervalued, 20-25 is a normal P/E Ratio, P/E values more than 25 are considered as high and indicates that the company is overvalued.
Due to the fact that P/S ratio doesn't hold the same valuation across different industries, this metric works best when you compare similar companies. When a company has a low ratio, it may show that the market undervalues its stock. In contrast, if the ratio is above average, then it might mean a financial market is overvaluing its stock.