What is Price-to-Sales (P/S) Ratio?
Nexa Consultancy | Startup & Finance Glossary
The Price-to-Sales (P/S) ratio is a valuation metric that compares a company's stock price to its annual revenue per share. It is often used to value companies that are not yet profitable.
Base Term for Startups: For early-stage, high-growth startups (especially in SaaS), the P/S ratio (or more commonly, a multiple of Annual Recurring Revenue - ARR) is a primary method of valuation, as they often have negative earnings.
Base Term for SaaS: A fast-growing SaaS company might be valued at a multiple of 10x to 20x its ARR, which is equivalent to its P/S ratio if it were a public company.
Calculation: P/S Ratio = Market Capitalization / Total Revenue
Base Term Example: A SaaS startup with an ARR of ₹10 Crore is raising funds at a valuation of ₹100 Crore. It is being valued at a 10x ARR multiple, which is its effective P/S ratio.