P/S Ratio in 3 Minutes
Why a company’s sales WON’T matter
One major reason investors purchase stocks is its revenue or sales. The idea lies in the fact that sales directly links to important aspects such as market share, number of customers, and trends in the expansion of business operations.
However, this aspect is often misleading in making a buying decision for stocks.
While a company like NVIDIA having high and growing sales is great, what many do not consider is the fact that everyone else could have seen that already.
If the strength of a company’s sales is recognized, naturally the price will increase as investors attracted to this aspect buy in.
Therefore, when you decide to purchase the stock, the reaction or recognition for the stock’s revenue could have already occurred, which means the price would not increase any further.
In simpler terms, the stock would be overvalued or in a position for negative price corrections.
The P/S Ratio
The P/S Ratio is used to determine whether a company is overvalued in terms of its sales. It is calculated by dividing the price of its stock by its sales.
P/S = Market Capitalization / Annual Sales
