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To determine whether a stock can be said to grow or not. *underestimate* There are many financial indicators that investors can use as analytical tools. one of them is *price-to-sale ratio* (P/S ratio).

In most investment literature Investors should buy stocks that are growing (*growth stock*) or a stock that is underestimated by the market despite being of good quality (*underestimate*).

## Understanding the Price-to-Sale Ratio

*price-to-sale ratio* is the ratio between Market capitalization Company with total revenue of the company

The function of the Price to Sales Ratio is to determine whether a stock’s price is too expensive (overvalued) in relation to the revenue the company receives.

The higher the P/S Ratio, the higher the share price. This is because the value of P > S or the price exceeds the efficiency of the company. On the other hand, if the P/S value is low, known as P < S, the stock is a *underestimate* (too cheap) and the price may rise and benefit investors.

This indicator was first proposed by Kenneth L. Fisher, a US investment expert and founder of Fisher Investments. And will soon be disappointed if the company’s growth doesn’t meet expectations.

therefore he prospered *price-to-sale ratio*. This indicator is slightly different from . *price to profit ratio* (P/E ratio)Unlike income, according to him, sales or revenue (gross income) are not influenced by accounting policies.

## Price-to-Sale Ratio Formula

There are two price-to-sale ratio formulas:

**P/S Ratio = (Market Value) / (Revenue)****P/S ratio = (stock price per share) / (earnings per share)**

Because the market capitalization is equal to the product of the stock price per share with the number of outstanding shares. Therefore, the second equation is equal to the product of the first equation and the number of outstanding shares.

## How to calculate the price-to-sales ratio

There are two steps to calculate the Price to Sales Ratio.

The first step is to research the market cap P/S ratio component. share price per share And the number of outstanding shares (if needed) can be searched on Google, Yahoo Finance or other financial news pages. The earnings and earnings per share can be found on the company’s income statement.

Please note that the earnings component herein is stated as income in a single accounting period (usually 1 year), as stock prices and market capitalizations can vary from year to year. So you need to calculate the average value.

The second step is to enter the existing data into the above formula. If you find market capitalization information You can use the first formula. But if you only find the price per sheet, you can use the second formula.

## Example of calculating the price-to-sale ratio

Let’s take an example from the financial data of PT Temas Tbk in 2021. It is well known that the company has the following financial information.

**Number of shares sold** : 5,705,150,000 pieces.

**Market capitalization** = 890.003.400.000 (Q1)

= 1.346.415.400.000 (Q2)

= 1,631,672,900.000 (Q3)

= 7,816.055,500,000 (Q4)

**Average market capitalization per year **: 2,921,036,800,000

**annual income**** : 3,370,324,000,000**

**Average share price in 2021** : 512 per share (derived from the market capitalization divided by the number of outstanding shares)

So, this shipping company’s P/S ratio is:

**P/S ratio = market capitalization/revenue**

= 2,921,036,800,000/3,370,324,000,000.

= 0.87.

**P/S ratio = share price/earnings per share**

= 512/ (3,370,324,000,000/5,705,150,000)

= 512/ 590.7511634

= 0.87

## What is a good P/S ratio?

As mentioned above The lower the P/S ratio, the better the stock is. This means that investors can buy these stocks at a price that is lower than the company’s actual ability (earnings).

To determine what a good P/S is, investors should also calculate the average P/S value of the company’s industry. The shipping industry average for this financial indicator is 0.5, so the share price of PT Temas above is somewhat more expensive than other companies in the same sector.

## price-to-sale ratio limit

### 1. Selling is not profit

The price-to-sale ratio uses gross income to compare stock prices. This means that companies with large gross income but small profits may still be of good value when using this indicator. (Much profit due to cost savings) may actually rank poorly in this indicator.

Therefore, the P/S ratio and the P/E ratio are used interchangeably by many analysts. The P/S ratio is used for companies with certain industries that tend to be difficult to profit. and vice versa

### 2. Debt is an important factor

There are companies with high incomes but large debts. This could mean that the company’s future earnings will be used to pay off debts and interest instead of paying investors dividends or increasing productivity.

Therefore, you should consider financial metrics related to liabilities such as: *Debt to Equity Ratio* (der) and others to determine the financial quality of the company

Generally speaking, companies with low P/S ratios are more valuable if they have little or no debt. Because that means companies can increase sales without relying too much on debt.

In fact, financial indicators must be used in conjunction with other financial indicators to form a comprehensive fundamental analysis. Although it takes time to understand and calculate. But comprehensive fundamental analysis can help investors avoid fraudulent investments. and get a good return on investment in the long run

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