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What you will learn
- Calculate P/S using market capitalisation and revenue in the same currency.
- Separate a sales multiple from a profit margin.
- State the price date and reporting period before comparing ratios.
P/S requires an identified sales period
In this lesson P/S means market capitalisation divided by company revenue. Both amounts use millions of SEK, making the quotient a number of times. Revenue covers sales over a period, whereas market capitalisation belongs to a price date. Record “model price date” and “latest supplied full-year revenue” alongside the result.
Our two fictional cards use the same price date and full-year periods of equal length. There are only ordinary shares and no differences in the reports’ sales scope. We assume the information is comparable for this calculation. That is a chosen premise, not something guaranteed merely because two reports use the word revenue.
If the table does not fit, scroll it sideways.
| Amount, SEK million | Company A | Company B |
|---|---|---|
| Market capitalisation | 900 | 900 |
| Full-year revenue | 600 | 900 |
| Full-year profit after tax | 120 | −45 |
Calculate a multiple in times rather than a return percentage
A has P/S of 900 / 600 = 1.5 times. B has 900 / 900 = 1 time. B therefore has less equity market value per unit of sales in these cards. The quotient does not say that sales are distributed to shareholders or that a holding earns a return of 100 or 150 percent.
Calculate profit separately: A has 120 / 600 × 100 = a 20 percent profit margin. B has −45 / 900 × 100 = −5 percent. Here lower P/S accompanies a loss, while higher P/S accompanies profit. The comparison demonstrates why analysing two companies takes more questions than ranking one multiple.
The sales multiple does not contain cost structure
CFA Institute describes how P/S omits cost differences and can present an incomplete picture of loss-making companies. Our example illustrates that boundary: sales appear in the denominator but costs and profit do not appear in the ratio. You cannot reconstruct the 20 or −5 percent margin from only P/S and market capitalisation.
Market capitalisation concerns shareholders; the measure does not automatically include a separate debt value. For a question about the wider capital base, EV and its specified definition provide another starting point. No single multiple is a universal answer. Currency, business model, report scope and period need explaining when making an actual company comparison.
Write a conclusion with its evidence attached
A supported statement is “B has P/S of 1 in these cards, but its profit margin is negative.” An insufficient statement is “B is best because 1 is below 1.5.” Ask someone to identify the missing information in the second claim. If supplied revenue is zero, this division cannot produce a P/S ratio.
Connect these questions to identity checks in company search and the revenue-and-profit lesson. This public lesson promises no P/S ranking, automatic selection or purchase recommendation in Investiq. All calculations concern fictional cards. A finished ratio does not replace an explanation of the business and the assumptions behind a comparison.
Try it yourself
A company card supplies market capitalisation of SEK 500 million, full-year revenue of SEK 250 million and profit of SEK −10 million. What are P/S and profit margin? Does the multiple itself establish profitability?
Show the solution and explanation
P/S is 2 times and profit margin is −4 percent. The multiple does not establish profitability; the card records a loss.
500 / 250 = 2. −10 / 250 × 100 = −4. Sales are positive in this example, so P/S is calculable even though profit is negative.
Check your understanding
Does P/S of 1 mean a 100 percent shareholder return?
No. It relates equity market value to sales, not the shareholder’s investment result.
Can this P/S definition be calculated when supplied revenue is zero?
No. It would require division by zero.
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Sources and examples
- CFA Institute: enterprise value, sales multiples and interpretation limits
- SEC: revenue, profit and financial statements
The sources support the factual explanations. Calculations and exercises were created for this lesson. Amounts and price changes are invented unless stated otherwise.
This material is educational and does not recommend securities to buy. A simulated result does not guarantee a future result.
