Price-To-Sales Ratio - PSR

See: Times Revenue.

Okay, so you’re paying $20 for a share of stock. Good? Bad? Cheap? Pricey? What does that $20 a share buy you?

Well, when a company is trading at “insane” internet bubble multiples of, say, 100x revenues, then that $20 for one share of stock bought investors only 20 cents of revenue, never mind earnings. Enormous growth had better happen, or that $20 will come back to earth fast.

An average earnings multiple in the modern era is something between 15x and 20x, something like that. So if a given company had, say, 27% operating margins, and was taxed, all-in, at 30ish percent, it’d have something like 20% net margins. Or said another way, on a dollar of revenue, they’d keep 20 cents. So if the revenue multiple was 5x, then that earnings multiple is about 25x. Five times five.

So when revenue multiples of companies are very high, i.e. they have a very high price-to-sales ratio, the company had better have extremely high profit margins and/or extremely high growth...or the weight of their lofty multiples will bring them down to earth. Fast.