Price to Sales Ratio (P/S) is a key financial metric used by investors to assess how much they are paying for each rupee of a companyís revenue. It is calculated by dividing the companyís market capitalization by its total sales or revenue over a specific period. The P/S ratio is particularly useful for evaluating companies that may not yet be profitable but have strong revenue growth potential.

A low P/S ratio generally indicates that the stock is undervalued relative to its sales, suggesting a potential buying opportunity. Conversely, a high P/S ratio may signal overvaluation or high investor expectations of future growth. However, the interpretation depends on the industry benchmark, as some sectorsólike technology or pharmaceuticalsótend to have naturally higher ratios due to their growth prospects, while mature industries often trade at lower multiples.

Unlike the Price to Earnings (P/E) ratio, which relies on net profit, the P/S ratio focuses solely on revenue, making it less affected by accounting adjustments or temporary profit fluctuations. This makes it a reliable tool for comparing early-stage or cyclical businesses that might not yet be profitable but show strong sales trends.

Investors should not rely solely on the P/S ratio for decision-making. It should be used alongside other valuation metrics such as P/E ratio, Price to Book (P/B) ratio, and Debt-to-Equity ratio to gain a comprehensive view of a companyís financial health. Additionally, consistent revenue growth combined with a reasonable P/S ratio often indicates sustainable business performance and efficient operations, key indicators of long-term value creation.