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Going deeper · 4 min read

P/S: valuing companies with no profit yet

When a company isn't profitable, P/E can't be calculated. Price-to-sales steps in: what you pay for each dollar of revenue.

It's blunt on purpose. A dollar of software revenue is worth far more than a dollar of grocery revenue, so P/S only works within an industry.

Very high P/S ratios are the classic signature of hype: the market is paying for revenue in the hope profit follows. Sometimes it does.

Remember

P/S is the tool of last resort — always ask what the future margin would need to be.

See a real example

Compare Nvidia, Amazon and Dollar General

What the market pays for a dollar of sales in three industries.

What this shows

The spread here is a spread in expected margins. Discount retail sales are cheap because almost none of them become profit.

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