Price–sales ratio

Price-sales ratio is a fancy way of saying how much money a company makes compared to how much its stock is worth.

Imagine you have a lemonade stand and you sell 500 cups of lemonade every day for $1 per cup. That means you make $500 every day. Now imagine that someone wants to buy your lemonade stand and all your lemonade supplies. They offer you $5,000 for everything.

The price-sales ratio is like asking if that $5,000 is a good deal or not. To figure it out, you need to divide the price they are offering you ($5,000) by the amount of money you make every day ($500).

$5,000 ÷ $500 = 10

So the price-sales ratio is 10. That means it would take 10 days of making lemonade at your stand to make back the amount of money you would sell your stand for.

In the stock market, things are a little more complicated, but the idea is the same. People use price-sales ratio to figure out if a stock is a good deal or not. If a company is making a lot of money for its size, then its price-sales ratio might be low, which means the stock could be a good deal. But if a company isn't making much money for its size, then its price-sales ratio might be high, which means the stock could be overpriced.