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Explanation: The Price-to-Sales (P/S) ratio compares a company’s market capitalization to its total revenue, indicating the amount investors are willing to pay per unit of sales. It provides insight into the market’s valuation of a company’s revenue generation.
How it helps in investment decision making:
Revenue Assessment: The P/S ratio helps investors assess a company’s valuation relative to its revenue generation capacity. A lower P/S ratio may suggest that the stock is undervalued, while a higher ratio may indicate overvaluation.
Comparison with Peers: Investors compare a company’s P/S ratio with those of its industry peers to evaluate its relative valuation. A lower P/S ratio compared to competitors may indicate that the company is undervalued within its industry.
Growth Potential: Changes in a company’s P/S ratio over time can provide insights into its growth potential. A declining ratio may suggest slowing growth, while an increasing ratio may indicate improving sales performance.
Example: TCS has a P/S ratio of 6.24 as of FY23. This indicates that investors are willing to pay approximately 6.24 times the company’s total revenue. Analyzing this ratio helps investors assess TCS’s valuation relative to its revenue generation capacity and make informed investment decisions.
You can view P/S Ratio for any company over time on Radar under Valuation Ratios in the Ratios section.