Sep 08, 2014,16.11 IST

What is Market-cap To Sales ratio?

Market cap to sales ratio also known as price to sales ratio indicates how the market is valuing every rupee of the company’s sales. It is used to compare the companies in the same sector.  It is also useful for valuation of a company that is incurring losses.

How to interpret market-cap to sales

Market-cap to sales is used for spotting recovery situations or for double checking that a company's growth has not become overvalued. If the ratio is less than 1 then the stock is considered to be undervalued. Many analysts prefer to use the Market-cap to sales ratio over the PE ratio, because it is easier to manipulate earnings, but sales can be more readily verified.

It is best to check both these ratios for any company. If both indicate that the stock is undervalued then you can consider buying it. But if the results are contrary to one another then it is possible that the management may be manipulating the books.

Formula
Market cap to sales = market cap/total sales or price per share/ sales per share

Example
Assume market-cap is Rs. 50 crore and sales is Rs. 100 crore
Market cap to sales = 50/100 = 0.50
This means for every rupee of sales you will be paying 50 paisa if you are buying the entire company.

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